Farm Level Economic Impacts of Energy Crop Production
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FARM LEVEL ECONOMIC IMPACTS OF ENERGY CROP PRODUCTION
FINAL REPORT
AUGUST 2005 Rural Business Unit Land Economy Research Group Department of Land Economy Scottish Agricultural College University of Cambridge West Mains Road 19 Silver Street Edinburgh Cambridge EH9 3JG CB3 9EP Telephone: +44 131 535 4046 Telephone: +44 1223 337 166 Email: [email protected] Internet: http://www.cam.ac.uk Internet: http://www.sac.ac.uk ACKNOWLEDGEMENTS
We would like to thank all the co-operators who provided details of their energy crops enterprises as well as Drax Power and, British Sugar for discussions.
Disclaimer The contents of this report reflect the views of the authors and not necessarily those of Defra or others that have contributed to the study.
Acknowledgements i CONTENTS
ACKNOWLEDGEMENTS...... I
CONTENTS...... II
ABBREVIATIONS...... VI
EXECUTIVE SUMMARY...... VII
1. INTRODUCTION, BACKGROUND AND OBJECTIVES...... 18
INTRODUCTION...... 18
BACKGROUND...... 20
CURRENT ENERGY CROPS...... 20
SRC PRODUCTS FOR ENERGY...... 22
INDUSTRY CONTEXT AND RECENT DEVELOPMENTS...... 22
LEGISLATIVE ENVIRONMENT...... 23
FARM LEVEL SUPPORT FOR ENERGY CROP PRODUCTION...... 24
OBJECTIVES...... 25
STRUCTURE OF REPORT...... 38 2. METHODOLOGY...... 39
APPROACH...... 39
FARM LEVEL COSTS...... 39
ASSUMPTIONS UNDERLYING BUDGETS FOR SRC AND MISCANTHUS...... 42
ASSUMPTIONS UNDERLYING BUDGETS FOR ARABLE CROPS USED FOR ENERGY...... 45
ASSUMPTIONS RELATED TO BUDGETS FOR CONVENTIONAL CROPS...... 47
IMPLICATIONS OF CAP REFORM (OBJECTIVE 2)...... 49
UPTAKE AT THE FARM LEVEL (OBJECTIVE 3) AND IMPACT ON THE FARM BUSINESS (OBJECTIVE 4)...... 49
THE POLICY SCENARIO AND MODEL ASSUMPTIONS...... 51
COSTS OF ENERGY AND CARBON AND ENERGY BALANCES...... 52 3. RESULTS: COSTS OF PRODUCTION...... 54
INTRODUCTION...... 54
COSTS OF PRODUCTION...... 54
ANECDOTAL EVIDENCE FROM THE SRC AND MISCANTHUS SURVEY...... 60
BUDGETS: RETURNS FROM SRC AND MISCANTHUS...... 62
PRODUCTION COSTS OF SRC AND MISCANTHUS...... 67
Contents ii BREAK EVEN ANALYSIS...... 69
UNCERTAINTIES SURROUNDING ESTIMATED COSTS AND RETURNS...... 72
BUDGETED RETURNS FROM ARABLE CROPS FOR ENERGY...... 72
DISCUSSION OF RETURNS FROM CROPS FOR ENERGY...... 77
REED CANARY GRASS AND SWITCHGRASS...... 80
IMPLICATIONS OF CAP REFORM...... 81 4. RESULTS: POTENTIAL UPTAKE AND IMPACTS ON FARM PROFITABILITY...... 86
INTRODUCTION...... 86
SHORT ROTATION COPPICE AND MISCANTHUS PRODUCTION...... 92
IMPACT ON FARM PROFITABILITY...... 97
FURTHER ISSUES...... 99 5. CARBON AND ENERGY BALANCES...... 101
LIQUID BIOFUEL SUPPLY CHAINS...... 102
BIOMASS COMBUSTION SUPPLY CHAINS...... 106
COST OF CARBON ABATEMENT...... 111 6. CONCLUSIONS AND FUTURE RESEARCH...... 114
REFERENCES...... 133
APPENDIX I. SUMMARY BREAKDOWN OF FUEL CHAIN COSTS...... 137
APPENDIX II. BUDGETS...... 151
Contents iii ABBREVIATIONS
AAP Arable Area Payment AEV Annual Equivalent Value (the NPV expressed as an equivalent annual payment every year over the length of the project) CAP Common Agricultural Policy CHP Combined Heat and Power CIF Cost Including Freight CSL Central Science Laboratory CRER Centre for Rural Economics Research, University of Cambridge DEFRA Department for the Environment, Food and Rural Affairs EEDA East of England Development Agency EFRA Environment, Food and Rural Affairs Committee (House of Commons, United Kingdom Parliament)
EtOH Ethanol (CH3CH2OH) DTI Department of Trade and Industry EU European Union FBS Farm Business Survey# GAEC Good Agricultural and Environmental Condition GM Gross Margin GHG Greenhouse Gas IACR Institute of Arable Crops Research (now Rothamsted Research) ICCEPT Imperial College Centre for Energy Policy and Technology LP Linear Programming n The number of units in a sample or sub-sample n/a Not Applicable NFFO Non-Fossil Fuel Obligation NM Net Margin NPV Net Present Value (the value of future payments discounted to the same value in current pounds) odt Oven Dry Tonnes (or dry weight equivalent = wet weight adjusted by moisture content) OECD Organisation for Economic Cooperation and Development ppl Pence Per Litre RBU Rural Business Unit, Department of Land Economy RCG Reed Canary Grass ROCs Renewables Obligation Certificates SAC Scottish Agricultural College SFP Single Farm Payment SRC Short Rotation Coppice (exclusively Willow in this study) USDA United States Department for Agriculture WTO World Trade Organisation
Abbreviations iv EXECUTIVE SUMMARY
Background and Objectives
The Government has set a target for 10 per cent of all electricity to be generated from renewable sources by 2010 (20 per cent by 2020). In addition the EU Biofuels Directive on the promotion of the use of biofuels or other renewable fuels for transport (2003/30/EC) was adopted in May 2003. This requires the UK and other Member States to set their own indicative targets for the use of biofuels and other renewable fuels. The Commission’s reference targets are 2 per cent use (calculated according to energy content) by the end of 2005 and 5.75 per cent use by 2010.
Energy crops are a possible source of heat, electricity and transport fuels (see Renewable Innovations Review, 2004) and considerable research has been undertaken examining the technical and environmental implications of energy crop production. However, relatively little work has been undertaken on the likely impact of the adoption of energy crop production at the farm level.
Objectives of Study
The first objective of the research was to provide an independent analysis of the farm level costs of production for existing energy crops and by-products. Examples include wheat, sugar beet, whole crop cereals, surplus potatoes and straw, oil seeds and specialist energy crops, SRC (poplar and willow) and Miscanthus.
The second, more general, objective was to assess the impact of the current CAP reforms and other potential drivers on the relative profitability of energy crops and hence the potential for farmers to adopt these crops.
The third objective was to gain an understanding of the returns necessary to mobilise resources into energy crop production. In terms of existing crops (oilseeds, wheat, sugar) this might be relative to alternative uses, whilst for SRC and Miscanthus it would be relative to conventional and other alternative forms of cropping.
Linked to the third objective was the assessment of the possible impact on farm level profitability of the introduction of specialist (ie dedicated) energy crops as this could have important implications for the economic sustainability of agriculture.
The final objective was to link with earlier work on costs, carbon and energy balances for the fuel chains under examination. For biofuels, the objective was to show the likely yields of road fuel (in tonnes/litres per ha), the net energy available at the point of use and the likely range of costs of that fuel (per tonne/litre/unit of energy). Comparable data was also required for power and heat generation from solid biomass.
Executive Summary v Approach
The costs of production for conventional crops that could be used as feedstocks for energy (wheat, sugar beet and oilseed rape) were estimated using farm business survey (FBS) data from the Eastern region. The costs for wheat, sugar beet and oilseed rape are relatively easy to measure given they are annual crops, widely grown and surveyed in the UK. This is not the case for SRC and Miscanthus as there were relatively few producers at the time of the study, the majority of whose crops had yet to reach the harvest stage. Therefore, to gain a better understanding of the costs of production a survey of current energy crop producers in England was undertaken.
It should be emphasised that the estimates for energy crop costs and returns used in this study are based on a mixture of observed costs from our farm level survey supplemented with reasonable estimates for variables that either could not be collected through survey or where observations were too few to be taken as robust (these included length of crop cycle, yields and prices). The key assumptions made were a sixteen year crop cycle for both SRC and Miscanthus; estimated yields of 9 and 14 odt/ha, respectively; farm gate prices of £35 and £25 per odt, respectively and; a discount rate of six per cent. Current support payments were included in the estimates (establishment grant and energy crop payment of 45 euro per hectare). These assumptions were varied to assess the impact on the results. The potential uptake of energy crops at the farm level and the impact on the profitability of the farm business, was modelled by using a farm level Linear Programme (LP) model developed at SAC.
The final stage of the study involved linking the estimates of feedstock costs from this study with available data from previous studies that examined the relative costs of production and energy balances associated with the different energy end uses (biofuels, electricity generation, heating etc). Key assumptions made at this stage related to the technology used for conversion (including efficiency of conversion), the value of by-products from the process (for animal feed for example) and scale of production. Given that there are a variety of technologies available to convert crops into energy and some uncertainty exists surrounding exact costs and emissions, results for energy usage, greenhouse gas emissions and cost of energy are generally presented in ranges. The low end of the range indicating the most favourable scenario (lowest energy requirement, lowest emissions resulting from production of energy and lowest cost) whilst the high range indicates the least favourable results.
Results
Farm Level Costs of Production
Table E1, highlights the estimated production costs per tonne and average returns at the farm level from the major crops considered in this study.
Executive Summary vi Table E1: Summary of Average Costs and Returns from Different Crops for Energy - using Standard Assumptions+ Crop Production Gross Margin Net Margin Cost (£/ha)* (£/ha)* Short Rotation Coppice - Willow - £66 /odt 97 -163 Miscanthus £46 /odt 75 -171 Wheat £97 /t 301 -216 Sugar Beet £24 /t 541 24 Oilseed Rape £204 /t 305 -212 + Details of underlying assumptions can be found in Chapter 2 of the report *For SRC and Miscanthus technically average equivalent values (AEV)
Under the above assumptions on yields, costs and prices, energy crops, on average, produce a negative net margin (Table E1). This may suggest that they are unlikely to be widely grown without more long-term support commitments. In particular it was found that:
- Average variable costs of production are roughly equal to the likely market price. - Average total costs of production (even with minimal fixed costs) are much greater than the market price.
Further analysis highlighted that, when fully costed, yields would need to be 78 and 88 per cent higher than our standard assumptions for Miscanthus and SRC, respectively (assuming no changes in costs or support payments) for the crops to break even (that is to achieve a net present value equal to zero). For both crops an increase in price of around 60 per cent would enable them to break even (again assuming no changes in costs or support payments). In terms of the energy crop payment (subsidy) it is estimated that this would have to rise to £218 and £193 per hectare per year for Miscanthus and SRC respectively from the current level of approximately £30 (assuming yields, costs and prices remain the same).
As implied above there are some key uncertainties relating to the costs and returns for energy crops that may alter our conclusions and these require further examination. Where the greatest variation is likely to arise is with the estimated yields and possible implications of improved technologies on yields and costs. Some simple sensitivity analysis was undertaken, through raising estimated yields and reducing estimated planting costs. The impacts on net margins are highlighted in Table E2. It is clear that a combination of higher yields and lower planting costs could have a significant impact on the profitability of energy crop production.
It should be noted that the estimated costs are, average, budgeted, costs of production that are based on full economic costs (for example imputing a rental value for land that is owner occupied and including a charge for farmer’s own labour). Due to the circumstances of the individual farmer, the actual costs of production may differ.
Executive Summary vii Table E2 Impact on Net Margin of Changes in Yield and Establishment Costs Crop Standard Higher Lower Combined Assumptions Yield* Planting effect” Costs+ Short Rotation Net Margin -163 -109 -138 -84 Coppice - (£/ha) Willow - Miscanthus Net Margin -171 -102 -99 -30 (£/ha) Notes *12 and 18 odt/ha for SRC and Miscanthus, respectively. Notes + Lower by £294 and £798 per ha for SRC and Miscanthus, respectively. Differences in cost saving due to possibility of planting miscanthus by muckspreader which is considerably cheaper. Notes ” assumed that impact of higher yield and lower planting are simply additive
Implications of CAP Reform
In terms of conventional arable crops it is shown that the recent reforms of the CAP have significantly reduced the profitability of wheat and oilseed production by decoupling the support payments. As decoupling has occurred rather than price cuts, the reforms are unlikely to increase the viability of using conventional arable crops for energy production. In fact, if there is sufficient reduction in production as a result of the reforms to make the UK a net importer of wheat, the price may rise reducing its viability as a feedstock. The reform of the sugar regime, whilst again reducing the profitability of production, does potentially benefit energy crop production as it involves large cuts in the supported price. However, the current interest in production is through use of surplus sugar, that is the additional sugar producers grow as a result of trying to attain their quota level. A reduction in the price of quota sugar may have the effect of reducing the amount of surplus production that is available for this use.
Decoupling reduces the opportunity cost of growing energy crops because the profitability of alternative land uses (the main arable crops and grass for livestock production) is reduced. In addition the fact that the energy crop payment is directly coupled to the production of energy crops also increases their attractiveness relative to other crops. However, farmers do have the option of not producing and just maintaining the land in good agricultural and economic condition, so energy crops will still have to be, at least, as economically attractive as this option.
Implications for the Farm Business
The impact on the farm business as a whole was assessed. This involved consideration of the impact of the new markets for conventional crops as well as the potential impact of adoption of specialist energy crops. The key findings for conventional crops are that unless the extra demand created is translated into price changes the impact on farm profitability will be minimal.
The is seen as a possibility for both wheat and oilseeds. As noted above, if sufficient extra demand is created for wheat (coupled with lower supply overall) for the UK to move into a deficit position, this could lead to an increase in price as the wheat price would now have to reflect the cost of transport to the UK. Recent HGCA figures have cited this as a distinct possibility and claim that it could lead to an increase of up
Executive Summary viii to £15 per tonne in the wheat price. For oilseeds, the EU is already in deficit and 40 per cent of current production is already crushed for biofuels. A potential lack of suitable substitute products suggests that increased demand for biofuels will have a positive impact on price.
The farm level linear programming model results, highlighted that decoupling does improve the relative viability of growing energy crops when compared to alternatives such as wheat, sugar beet and oilseed rape. Our analysis does suggest that it is feasible that energy crops could be adopted although the likely impact on the overall profitability of the farm business is likely to be fairly minimal unless their profitability changes markedly. It does however have to be noted that if biofuel demand is translated into higher prices for wheat and oilseeds in the UK, this will reduce the viability of growing energy crops as their opportunity cost will increase.
Energy Balances, Emissions and Production Costs
Tables E3 and E4 summarises our results for fossil energy requirements, greenhouse gas emissions and costs of production for the various energy chains. Whilst the circumstances differ for the individual energy chains (i.e number of available technologies, by-products produced etc), in general the low estimates relate to the best case scenario (i.e. lowest estimates of costs of production at the farm level, most efficient technology and the offsetting of some of the costs through profits from the sale of by-products). On the other hand the high cost estimates generally assume the higher farm level costs, no sale of by-products, more costly technologies.
Table E3 Summary ranges for liquid biofuel chain fossil energy inputs, greenhouse gas emissions and costs
Fossil Energy GHG Emissions Cost (£/gasoline- Requirement Liquid Biofuel Supply (kgCO2eq./GJ) equivalent litre) Chain (GJf/GJ output) Low High Low High Low High Ethanol from Wheat 0.27 0.90 51.48 79.45 0.36 0.57 Ethanol from Sugar Beet 0.30 0.92 28.00 51.00 0.41 0.55 Ethanol from Wheat Straw1 0.13 0.28 5.30 13.00 0.29 0.44 Biodiesel from Rapeseed 0.39 0.44 49.00 54.00 0.38 0.87 Rapeseed oil from oilseed 0.29 ± .02 31 ± 2 not calculated rape2 ¹ Projected for commercial plants ² Rapeseed oil data based on Elsayed et al (2003). Rest compiled by Imperial College. Data for ethanol from wheat based on Rickeard, et. al., WTW Evaluation for Production of Ethanol from Wheat; Low Carbon Vehicles Partnership Fuels Working Group, Well-to-wheels Sub-Group, September 2004; Energy and GHG data for bioethanol from sugar beet and biodiesel from rapeseed from Concawe Report Well-to Wheels Analysis of Future Automotive Fuels and Powertrains in the European Context, 2003; Energy and GHG data for ethanol from wheat straw from Woods and Bauen, Technology Status Review and Carbon Abatement Potential of Renewable Transport Fuels in the UK, DTI 2003
Executive Summary ix Table E4 Summary ranges for biomass fuel chain fossil energy inputs, greenhouse gas emissions and costs
Cost (p/kWe for Fossil Energy electricity or CHP GHG Emissions Biomass Combustion Supply Requirement chains or p/kWth (kgCO2eq./GJ) Chain (GJf/GJ output) for heat-only chains) Low High Low High Low High Electricity from Wheat Straw 0.57 0.65 65.00 67.00 5.98 5.98 Electricity from Miscanthus 0.25 0.29 25.00 27.00 6.02 6.65 Electricity from Willow SRC 0.36 0.40 22.37 26.37 5.38 7.67 Heat from Wheat Straw 0.28 0.31 23.62 25.62 1.42 1.62 Heat from Miscanthus 0.17 0.19 8.64 10.64 1.40 1.84 Heat from Willow SRC 0.10 0.14 6.01 10.01 1.67 2.20 CHP from Wheat Straw 0.29 0.30 23.62 25.62 4.74 5.71 CHP from Miscanthus 0.18 0.19 8.64 10.64 4.57 6.30 CHP from Willow SRC 0.24 0.28 15.20 19.20 3.82 8.26 Energy and GHG values from Elsayed, et. al.; Carbon and Energy Balances for a Range of Biofuel Options, DTI 2003; costs calculated from ICCEPT figures, using Cambridge data for feedstock costs
Assuming that fossil fuel equivalents are around 2 p/kWh for electricity generation 2 p/kWh for gas heating, and around 26 pence per litre for gasoline, are results indicate for the majority of the fuel chains considered, that even at the lower end of our cost estimates, energy production from farm crops are not currently commercially competitive in the absence of support from Government.
This said, our results support the findings of the biomass task force in that currently the only viable exception would appear to be small scale heating plants (or CHP) using SRC or Miscanthus. Heat produced from biomass ranges in cost from around 1.4 to 2.2 pence per kWh (thermal). However, as also noted by the Biomass task force, established supply chains for biomass fuels are lacking. Hence, where it is available, gas is likely to remain more convenient and cheaper, without changes which would result in an integrated supply chains (eg boiler suppliers linked to biomass producers, resellers and sources of demand - schools, hospitals, district heating, etc).
Whilst our findings highlight the gap in the costs between renewable and fossil fuels in the absence of government support, it is clear that support is already been given which can help overcome this gap. For example, the price differential for large-scale power operations between biomass and conventional fuels can be overcome by ROCs (and this may explain the growth in energy crop production close to power stations that are co-firing). However, the current ending date for co-firing may act against energy producers entering into the necessary long-term planting contracts with growers. In addition the tax break on biofuels makes bioethanol and biodiesel production more viable and again can explain the current proposals to develop plants in the UK.
A major part of the justification of the support offered for renewable fuels relates to the environmental benefits in terms of energy saving and reduced emissions. A common measure is the cost per tonne of carbon abated. The Government has set a
Executive Summary x level of £70 per tonne of carbon which is an estimate of the cost to society of carbon emissions. Our analysis highlights that for biofuels the estimated cost per tonne of carbon abated ranges from £206 for biodiesel, to £370 for bioethanol produced from sugar beet (in all cases assuming low cost estimates and low emission levels). In contrast, the production of heat from Miscanthus and SRC is particularly efficient in terms of net energy produced and GHG emissions. This, coupled with the fact that it is actually cheaper than the fossil fuel equivalent (at the lower end of our cost estimates), means that heat generation from Miscanthus or SRC fired boilers would result in a saving of up to £117 per tonne of Carbon emission abated for Miscanthus or £61 for SRC chips.
There are, of course, a number of alternative sources of renewable energy available to the Government to meet its obligations with respect to electricity generation (wind, wave, etc). However, in terms of biofuels there are currently few viable alternatives. Therefore it was perhaps inevitable that the market had to be stimulated (the chosen method was the Renewable Transport Fuel Obligation) for the UK to achieve its targets.
A key question is the extent that the RTFO will lead to improved returns to UK farmers. In, theory if bioethanol were produced from wheat at the rate of 1 Mt per year this would consume 3 Mt of wheat, and would produce sufficient fuel to meet the required 5.75% share of petrol. This level of demand could boost wheat prices. However, the ongoing process of trade liberalisation means that unless imports can be prevented (perhaps due to infant industry arguments or on non-economic grounds such as protection of the environment) then the benefits of such a market may not be directly felt by domestic agricultural producers. For example, it is understood that Brazilian ethanol is imported into the UK at around 26 pence per litre, much less than the estimated minimum cost of production in the UK of 36 ppl. Though there is some debate as to whether this low price for imports would be maintained if demand increased significantly.
Biodiesel is currently produced in the UK from used cooking oils. Domestic oilseed rape does provide a good feedstock but is not at present being so used. Again, the introduction of the Renewable Transport Fuel Obligation could alter the situation considerably. Although import penetration is again an issue, the current deficit situation in the EU for oilseeds and the potential barriers to other oilseeds being substituted for oilseed rape might mean that the development of such a market could lead to higher prices for producers and therefore benefit the agricultural sector.
Conclusions
Under the reasonable assumptions made for this study, when costed at full economic costs, specialist energy crops do not appear, on average, to generate a positive net margin at current prices. However, producers who can attain higher yields and have lower costs than those assumed in this study may be able to grow the crop profitably.
Our analysis highlights that on purely economic grounds energy produced from agricultural crops is not commercially competitive for many of the fuel chains examined (in the absence of government support). The exception is the use of
Executive Summary xi biomass for heating or CHP. However, our findings do highlight that production of renewable energy from crops tends to result in positive energy balances and lower emissions than fossil fuel equivalents. Therefore there are other factors than just economics which might justify support been given to the sector.
The fact that the production of energy is from crops is currently not commercially competitive emphasises the key importance of government in terms of providing direct and indirect support to the sector. This support takes the form of form of incentives such as tax concessions for biofuels and establishment grants and annual payments for biomass. It also takes the form of regulation through the RTFO for biofuels and ROO for biomass.
Executive Summary xii 1. INTRODUCTION, BACKGROUND AND OBJECTIVES
Introduction
1.1 EFRA (2003) noted that “While we welcome the development of new markets for crops and opportunities for farmers to diversify and respond to market demands, we have not seen enough evidence to allow us to make an accurate assessment of what impact increasing the use of biofuels would have on farm incomes. We recommend that Defra, as a matter of urgency, carry out an economic appraisal of the effect that a UK-based biofuels industry would have on farming.”
1.2 Whilst the EFRA report was specifically considering biofuels it is clear that a similar argument can be made concerning crops for other energy uses. As noted by the Government, in reply to the EFRA study, some work has been undertaken on the production costs of biofuels and the range of feedstock prices. However, generally this has not used detailed farm level data but more general estimates of costs.
1.3 Work has been undertaken on many aspects of bioenergy production including technical, environmental and carbon balance implications (for example see CSL, 2003, Eyre et al 2003, Elsayed et al 2003, ADAS 2003). A recent study on the impacts of a bioethanol industry has also been completed for EEDA (2003). This study links with and adds value to this previous research.
1.4 Other studies have been undertaken examining the costs of production of biomass. For example Walsh and Brown (1998) analysed the likely costs and returns from short rotation coppice (SRC) and Miscanthus and considered its competitiveness with other land uses under the Agenda 2000 reforms. Bullard (1998) has examined the costs associated with Miscanthus agronomy and Walsh (2001) has considered harvesting and handling costs for energy crops. Market developments and agricultural reform have left these figures outdated and this study revisits energy crop production economics and land use in the light of a decoupled CAP. Since SRC and Miscanthus are relatively new crops in the UK there has been little information on the commercial costs and returns of production which may vary from research findings and the ‘budgeted’ figures that have been used in earlier costings studies.
1.5 More recent work has explored the implications of an expanded energy crops industry in the UK. The CSL (2003) report which argues that ‘given the current downturn in extensive grassland systems, biomass production could expand [into these areas]’ (p16). There is a need to gain an understanding of when, in terms of economic profitability, biomass might expand into grassland areas and what implications this would have for the profitability of the farm
Introduction, Background and Objectives 13 sector. Eyre et al (2002) discuss the possible contribution of annual crops to meeting road fuel demand. They note that in order to produce 200-500 peta joules per year of transport fuel (or around 15% of primary transport energy in the UK) would require around 4 Mha of land. This represents two-thirds of current arable land and would require a very high proportion of land resources to be taken out of food production. However the report does not address the question of the price level at which land might switch from food production to energy crop production. A further example arises from the Eyre et al (2002) report. When considering biomass they make the assumption that ‘… for the purposes of this illustration we assume that up to 25 per cent of UK agricultural land becomes available.’ But, there is no discussion of where this land would become available from and at what cost. Analysis at the farm level enables the validity of such statements to be examined in more detail and realistic assessments may be made of the potential impact on the farm business.
1.6 This research is intended to address the problem of a lack of detailed, impartial evidence concerning the effect of a UK bioenergy industry would have on farming. This information is allied to the cost of bioenergy from UK farms connected with current and projected fossil fuel/ energy costs.
1.7 Similar issues concern the relative economic viability of alternative forms of energy. For biofuels for example, there is the possibility of production from a number of crops, including perennial crops (Miscanthus and SRC) or from annual crops such as rapeseed, sugar beet and wheat. Whilst there may be sound environmental and other reasons for energy crops, uptake will only occur if they can compete with existing land uses in the case of new crops or alternative uses for the crop in terms of existing crops. Therefore, it is necessary to have a detailed understanding of the economics of the farm business, in order to understand how the crops will fit in with the current farming systems.
1.8 There is also a need to relate the economics of the energy crops with their carbon and energy balances to enable a complete picture of the viability and impact of the production of bioenergy.
1.9 Farmers’ choice of land use is determined by a complex interaction of a number of factors. One of the major factors in terms of European agriculture is EU policy. The recent reforms (and the proposed reforms of the sugar regime) have the potential to significantly alter the relative profitability of alternative land uses in the UK. In particular the implications of decoupling, cross-compliance, the single farm payment, energy crop payment and set-aside need to be considered. As mentioned above, these reforms also mean that much of the earlier work on energy crops at the farm level (Walsh and Brown, Bullard) will now be out of date. Again this emphasises the need for a detailed examination of energy crops at the farm level.
Introduction, Background and Objectives 14 1.10 Two approaches offer a means of investigating the supply and demand for energy crops. It is possible to start with an assumption concerning the level of demand and work back to the impact on farms, or start with the likely level of supply at the farm level at different prices and work through the supply chain to consider what this means for its competitiveness with alternative sources of energy. The latter approach is deemed the most suitable for this project.
Background
1.11 The existing, small scale, energy crop industry in the UK has developed in response to a series of policies, which were developed to initiate energy crops alongside other sources of renewable energy. Technology developed within the UK and elsewhere in the world has provided potential markets and reduced production costs. A small number of innovative entrepreneurs have taken the opportunity to grow energy crops. The area of SRC is currently around 1500 ha and there is possibly a similar area of Miscanthus.
Current Energy Crops
1.12 Energy crops are broadly defined in this study as any crop grown for fuel, heating or power generation. There are numerous applications when unproven technologies are included in the list of candidate technologies (see for example Woods and Bauen, DTI 2003). Novel technologies have great potential but the accompanying technical problems have, as yet, proved insurmountable. This study, therefore, deals only with those technologies which have been proven up to now, with the exception of ethanol from wheat straw. We thus exclude gasification/combustion, Fisher-Tropsch synthesis of liquid or gaseous fuels from volatilization gases, and the numerous hydrogen based technologies. Table 1.1 lists the crops and technologies under consideration in this study.
Introduction, Background and Objectives 15 Table 1.1 Energy Crops and Conversion Technologies Considered in this Study Crop Technology Fuel Type
Miscanthus Combustion for: Heat; Combined Heat and Solid Power; or for Power Generation SRC Combustion for: Heat; Combined Heat and Solid Power; or for Power Generation Whole-Crop Combustion for: Heat; Combined Heat and Solid Cereals Power; or for Power Generation Straw Combustion for: Heat; Combined Heat and Solid Power; or for Power Generation
Wheat Fermentation followed by Distillation of Liquid Transport Fuel (bioethanol) Sugar Beet Fermentation followed by Distillation of Liquid Transport Fuel (bioethanol) Oilseed Rape Extraction of Oil, followed by Esterification Liquid to Rapeseed Methyl Ester (biodiesel) Oilseed Rape Un-esterified oil used directly in refinery Liquid Straw Ethanol following enzyme de-lignification Liquid
1.13 Current use of energy crops in the UK is currently limited to co-firing of SRC in coal-burning power stations and combustion of straw and Miscanthus for electricity generation via steam. There is, at present, around 1500 ha of SRC, and possibly a similar area of Miscanthus, in the UK. The use of SRC for co- firing is just starting and has been conducted to date on a largely experimental basis. Negotiation of contracts is currently ongoing. The combustion of straw and Miscanthus commenced in December 2000 under a Non Fossil Fuel Obligation (NFFO) contract, which will terminate on 2013, at a 38 MW power plant near Ely. Other installations to burn Miscanthus are planned.
1.14 Biofuels, along with biomass plants, have attracted widespread interest and Biofuels plc is commissioning a 250,000 tonnes per annum biodiesel plant on the Teesside. The plant was designed to use a variety of feedstocks, principally palm oil which is cheaper than rapeseed oil and, accordingly, the company has hedged the price difference between crude palm oil and diesel for 50% of production. Losses have been incurred as the intended German market has not developed as anticipated. Other, much smaller, biodiesel plants use waste vegetable oil. Some 300 producers have registered with HMC&E for the duty rebate. There is also widespread commercial interest in producing bioethanol from wheat - after all 3 Mt of wheat could be used, from the exportable surplus of around 3 to 4 Mt, to produce sufficient bioethanol for 5.75% inclusion (calculated by energy content) in all petrol sold in the UK. However imported ethanol is likely to be cheaper than home produced.
Introduction, Background and Objectives 16 SRC Products for Energy
1.15 SRC can be produced in several forms ex-farm. Chips of about 20mm are the most commonly traded. Chips can be burnt directly in purpose built boilers or CHP plants, however they have the disadvantages that they will rarely dry to less than 35% moisture in the field and significant losses of biomass can occur through decomposition. Chips can be produced directly in the field with modified maize harvesters, which are relatively easily obtained in this country. Fungi will grow on the moist chips and in some countries safety precautions are taken to avoid excessive contact with spores. Also the bulk density of SRC chips is relatively low at 140 kg (dry matter)/m3.
1.16 Billets are another product pioneered by the ex-Arbre farmers of Renewable Energy Growers Ltd. These are harvested with a modified sugar cane harvester and are about 200mm in length. Having bark on the exterior, and much greater air spaces, they will dry down more than chips when stored in the field - moisture contents of less that 35% have been achieved in late winter. Because billets dry better and the freshly harvested, wet, wood is protected by bark, fungi and losses due to decomposition are not significant problems. However billets need additional processing before end use and their bulk density is even lower than that of chips, which adds significantly to the cost of transport.
1.17 Granules are the newest ex-farm product. They are made from billets by a plastics granulator and screens and, as their size can be cut to demand they can be used directly for co-firing with coal, which enhances their value. As they are produced from billets their moisture content is as low as that of billets and densities of over 175 kg (dm)/m3 have been achieved.
1.18 SRC granules are only produced by one supplier as yet, and comparative figures are not readily available for specifications and costs. Hence although granule technology is potentially superior we present our analysis for SRC chips because this is a more established product and comparative figures are available.
Industry Context and Recent Developments
1.19 The Arbre scheme, near Eggborough (Yorkshire), was the biggest planting of energy crops in the UK to date. Around 1800 ha of SRC (willow) were set under the scheme and a power station, based on the potentially more efficient gasification technology, was constructed. However the plant ran for just eight days before the scheme declared itself bankrupt in the face of costly technical problems.
1.20 To date biomass schemes have tended to use untested technology which failed, causing growers to lose faith in the crops. Of the seven gasification projects
Introduction, Background and Objectives 17 listed as funded under the Non-Fossil Fuels Obligation in 1998 (Natusch, 1998), none could be found cited as successful examples in 2005. Current schemes emphasize co-firing (with coal in existing boilers) or conventional combustion (of Miscanthus or straw) to generate electricity via steam. In Austria and Sweden use of bioenergy has taken advantage of the great efficiencies achieved by combined heat and power (CHP) plants – of which there are a few small installations in the UK. By contrast there were over 50,000 biomass heating installations in Austria by 2002 (RCEP 2004).
1.21 A number of existing producers of SRC and Miscanthus plan to sell planting material to UK energy crop producers.
Legislative Environment
1.22 The Kyoto Convention, to which the UK governments have subscribed, commits the country to reducing greenhouse gas emissions by 12.5 percent between 1990 and 2008/2012. Specifically, CO2 emissions should be reduced by 20 percent between 1990 and 2010, and reduced by 60 percent by 2050. In light of these commitments the UK government instituted the Renewables Obligation Order (formerly Non Fossil Fuels Obligation) under which 10 percent of electricity is to come from renewable sources by 2010 (measured in Wh). Most of this is expected to come from wind generation, and co-firing of biomass (with coal) which, as planned, will no longer be eligible for ROCs by 2016. As part of the Renewables Obligation Order generators are committed to obtaining Renewables Obligation Certificates (ROCs) by purchase or generation of electricity from renewable sources. The current provisions for ROCs include the following:
- Any biomass can be co-fired until 31 March 2009 with no minimum % of energy crops (may include forestry products and agricultural wastes); (Imports of coconut and olive wastes are understood to be ongoing) - 25% of co-fired biomass must be energy crops from 1 April 2009 until 31 March 2010; - 50% of co-fired biomass must be energy crops from 1 April 2010 until 31 March 2011; - 75% of co-fired biomass must be energy crops from 1 April 2011 until 31 March 2016. - Co-firing ceases to eligible for ROCs after 31 March 2016
1.23 The Renewables Obligation Order will be subject to review in 2006: “…the effectiveness of the Obligation in delivering our renewables targets and aspirations, will be [a] critical consideration[s]”.
1.24 The EU Biofuels Directive sets targets of 2 percent substitution of biofuels (bioethanol and biodiesel) for fossil derived road transport fuels by the end of 2005 and 5.75% by the end of 2010. These are specified on the basis of energy content so the proportion by volume is correspondingly greater. The
Introduction, Background and Objectives 18 government is currently considering whether to introduce a Renewable Transport Fuels Obligation to provide incentives to achieve these levels of substitution. Current levels of substitution are much lower and are based on a tax derogation of 20 pence per litre for biofuels. This derogation has stimulated production of biodiesel from waste oils and a large plant (250,000 tonnes per annum) is under construction on the Teeside, which will in all likelihood process imported oils (this is described in paragraph 1.13). Other biodiesel plants are planned. In Germany biodiesel is free of duty, which has stimulated substantial industrial demand for rapeseed oil with production close to 1 M tonnes per annum.
1.25 The Energy Crops industry has been dependent on government policy, to date, because these crops and end products have not been viable without subsidy or statutory enforcement. Such measures are justified by the existence of externalities in fossil fuel use (principally greenhouse gas emissions and consequent global warming). The UK government has made an initial estimate of acceptable costs for reducing C emissions of £70/t C released to the atmosphere. But, the incurred costs might be higher if emissions in the transport sector are targeted by the government (because all the alternatives are more costly). It should be noted that the cost of carbon abatement for any of the alternative considered here lies substantially above the indicative social cost of carbon estimate of £70/tC.
1.26 The government might still introduce further measures to support compliance with the EU Biofuels Directive and to support the creation of other renewable energy industries (EFRA, 2003). The recently introduced Renewable Transport Fuels Obligation is an example of this. Possible application of the EU Energy Crops Aid to crops on set-aside land could be another example.
Farm Level Support for Energy Crop Production
1.27 The Energy Crops Scheme provides planting grants for SRC and Miscanthus plantations, funded and administered by Defra. These grants are currently set at £1000 per hectare for SRC and £920 for Miscanthus, but uptake of the scheme has been poor with only £904,281 awarded under ECS to December 2003 and only £228,688 of that had been claimed. Uptake has not been proportionately greater in the period since then, and the scheme is subject to review in 2005.
1.28 The Bio-energy Infrastructure Scheme provided £3.5 million in grants for setting up producer groups to supply eligible biomass (excluding SRC), also funded and administered by Defra. These covered administrative and training costs, as well as purchase of harvesting or drying equipment, or storage facilities.
Introduction, Background and Objectives 19 1.29 Set-Aside land may be used for the production of energy crops, that can also be used for food or feed, provided an end-use contract is in force and, additionally a deposit of €250 per hectare is lodged with the Rural Payments Agency1. Energy crops without food or feed uses may be grown on set-aside without a contract or security. Cultivation of energy crops for on-farm use is permitted provided the grower makes a declaration to that effect to the Rural Payments Agency.
1.30 Set aside will be levied at a rate of 8 per cent of rotationally cropped area under the reformed CAP. However, farmers will be able to leave additional land uncropped.
1.31 The Single Farm Payment will be payable on both set aside and other rotational land regardless of land use. To ensure receipt of the Single Farm Payment, land must meet cross compliance conditions. These comprise adherence to Statutory Management Conditions and for land to be maintained in Good Agricultural and Environmental Condition (GAEC).
1.32 The CAP offers payments of up to 45 €/ha (depending on uptake of the scheme across the EU) under the Energy Crop Aid scheme for energy crops (including conventional crops such as wheat and oilseed rape), that are not on set-aside, which have an end user contract, and which provide a security deposit of 60 €/ha2. This was introduced in 2004.
Objectives
1.33 The first objective of the research was to provide an independent analysis of the farm level costs of production for existing energy crops and by-products. Examples include wheat, sugar beet, whole crop cereals, surplus potatoes and straw, oil seeds and specialist energy crops, SRC (poplar and willow) and Miscanthus. Where crops are produced over a life cycle of more than one year the costs were placed on an annual equivalent value basis (AEV). A particular feature of this research is that the distributions of costs are considered as well as average costs.
1.34 The second, more general, objective was to assess the impact of the current CAP reforms and other potential drivers on the relative profitability of energy crops and hence the potential for farmers to adopt these crops.
1.35 The third objective was to gain an understanding of the returns necessary to mobilise resources into energy crop production. In terms of existing crops (oilseeds, wheat, sugar) this might be relative to alternative uses, whilst for SRC and Miscanthus it would be relative to conventional and other alternative
1 http://www.defra.gov.uk/farm/capreform/pubs/pdf/Setaside-hb.pdf 2 http://europa.eu.int/scadplus/leg/en/lvb/l11089.htm
Introduction, Background and Objectives 20 forms of cropping. An understanding of the distribution of costs will enable a ‘supply’ curve for energy to be constructed highlighting the likely uptake at different prices.
1.36 Linked to the third objective was the assessment of the possible impact on farm level profitability (and employment) of the introduction of specialist (ie dedicated) energy crops. This could have important implications for the economic sustainability of agriculture.
1.37 The final objective was to link with earlier work on carbon and energy balances. For example in relation to biofuel this will enable us to show clearly the likely yields of road fuel (in tonnes/litres per ha), the net energy available at the point of use and the likely range of costs of that fuel (per tonne/litre/unit of energy). Comparable data is also required for power and heat generation from solid biomass.
Structure of Report
1.38 This chapter has provided an introduction to the study, an overview of the existing policy and industry structure in the UK and considered the objectives set for study. Chapter 2 outlines the methodology adopted to achieve the objectives set for the study describing the farm survey, the budgeting process, the development of the farm level model and the sources used to calculate final energy costs and emissions. Chapters 3 and 4 present the findings of the study with respect to estimates of farm level costs of production, the potential impact of CAP reform on energy crop production and the likely impact of adoption of energy crops on the farm business. Chapter 5 presents the results of the analysis of the fossil fuel requirements, the level of GHG emissions and the costs of the final energy for each of the energy chains considered in this study. Chapter 6 presents the conclusions of the study.
Introduction, Background and Objectives 21 2. METHODOLOGY
Approach
1.1 This Chapter outlines our approach to achieving the objectives set for this project, namely; measuring farm level costs; assessing the impact of recent policy reform; assessing potential impact of energy crops on the farm business and; analysis of energy cost and carbon and energy balances for the alternative crops.
Farm Level Costs
1.2 Farm level costs of production of energy crops and by products were achieved through detailed analysis of farm level costings. These were obtained from the Farm Business Survey (which is a whole farm business study) and also available information from the Defra Special Studies Programme (which are enterprise specific). Such farm level data were not available for SRC and Miscanthus and additional survey work was carried out (and supplemented by realistic budgeting) and this is described in the next section.
Survey Methodology
1.3 Addresses of all known growers of energy crops were obtained from Defra and other sources. A majority of those with crops were surveyed by personal interview for details of their farms and related energy crops. The aim was to obtain detailed independent costings in a comparable format to those available for the other crops (this depended upon availability of information from growers). The survey was designed to include around 40 enterprises with SRC and Miscanthus (the exact split between enterprises depending upon numbers growing each crop). Using farm level data allowed us to consider the distribution of yields, costs and returns across farms. Cost and returns were placed on annual equivalent value (AEV) basis to allow comparison.
1.4 In the absence of other, independent, assessments of production costs, the two energy crops recorded for this study were SRC (exclusively willow) and Miscanthus. The survey was designed to collect production costs relating to establishment, upkeep and harvesting for all crops grown for energy production.
1.5 The methodology adopted followed that developed for the Defra Special Studies Programme. This methodology has been developed by the Universities and Colleges participating in Defra’s Commissioned Work Programme and is a robust method for allocating costs to specific enterprises.
1.6 Addresses were supplied by Defra in three forms: farms that had applied for an Energy Crops Scheme Grant (to November 2004), Woodland Grant
Methodology 22 Scheme (largely Ex-Arbre) growers (to December 2004) and contacts through the Arable Crops & Farming Systems Science Unit (Defra - “Audit of Bio- Energy Crop Trial Sites”). Recruitment was achieved by sending letters to farmers and then either telephoning them directly or supplying a pre-paid envelope with the recruitment letter.
1.7 Table 1.1 presents details of the recruitment campaign for the survey. Altogether 99 energy crop growers were approached to participate. Of these, 20 were not applicable (the majority of which had applied for the energy crop scheme grant but had not actually planted any crops yet or had decided against planting any at all). A further 25 were non-respondents that could either not be contacted by telephone or did not respond in the pre-paid envelope provided with the recruitment letter. This made the possible recruitment figure 56. However, 11 of these refused to take part. Reasons for non- cooperation included being disappointed with the scheme e.g. ‘crops ready to be harvested, but nowhere to send them as station at Eye did not materialise’ and not having time to commit to the survey. In total 45 growers agreed to co- operate. Each farmer was visited once during either December 2004 or January 2005. However, once all visits had been made, it was apparent that some of the records could not be used due to insufficient information (mainly due to farms where nearly all work was done by a growers group or contractors and the farmer did not know the costs). This made the total number of records actually used for analysis 39. The majority of farms surveyed were in Yorkshire and Humber, West Midlands and East Midlands.
Methodology 23 Table 1.1 Summary of Recruitment Energy Woodland Other Producer Total Crops Grant Defra Group Scheme Scheme Total no of addresses 68 23 8 - 99 supplied by Defra Number no 14 11 0 - 25 response Number not 16 0 2 - 18 applicable¹ Number 30 9 4 9 45 recruited
Number refusals 8 3 0 - 11
Number SRC records 8 4 2 9 23 completed and analysed Number Miscanthus records 16 0 0 - 16 completed and analysed Total records 24 4 2 9 39 completed/used ¹ - The classification ‘Not applicable’ applied almost exclusively to growers who had been accepted for planting grants but had not yet planted any energy crops.
1.8 The information was collected and recorded on a questionnaire by personal interview with each co-operating grower. During the course of each interview the investigator, in conjunction with the grower, worked through the appropriate information. The questionnaire was split into sections that included indicative, census, tenure and rent, labour, specific machinery, specific equipment and building data. The second part of the questionnaire examined seed and fertiliser costs, crop protection materials, contract and miscellaneous cost variables, output, marketing and subsidies and operational records of labour, tractors and implements.
Basis on Which Prices are Quoted 1.9 For sugar beet the price is quoted as the price delivered to the factory. However we include the cost of transport in budget for sugar beet, so the net revenues are effectively ‘ex-farm’.
1.10 For both Miscanthus and SRC we quote the return to the grower as the price per oven dry tonne (odt), loaded ex-farm. This makes the returns comparable with grains (wheat and oilseed rape) which are usually quoted on the same basis (and could supply large quantities for fuel in the future).
1.11 Wheat and oilseed rape prices are quoted ‘ex-farm’ as received, as is the convention.
Methodology 24 Assumptions Underlying Budgets for SRC and Miscanthus
16 Year Time-Frame
1.12 An important factor in the calculations of the costs and returns for energy crops is the time-frame for production. Previous research on SRC crops used a nineteen year time-frame (Walsh and Brown, Defra). However, in this study a time-frame of 16 years was chosen for the following reasons:
1). It is widely assumed that willow varieties with improved yields will become available and make replanting economic after 16 years have elapsed
2). Sixteen year budgets are used by Renewable Energy Growers Ltd (the largest grower group - ex-Arbre) and TV Bioenergy Coppice, although ESD Biomass Ltd use 8 year budgets
3). Sixteen years is viewed as a more realistic period over which to amortise the planting costs, than shorter periods.
1.13 Miscanthus also follows the 16 year time-frame in order to make the two crops more directly comparable and, because Miscanthus producers also believe that new varieties will make replanting economic after around 15-20 years.
Inflation
1.14 It should be noted that all financial flows have been calculated at today’s prices and that the discount base year is 2004. We have thus not adjusted the flows for inflation, in accordance with both HM Treasury guidelines (Treasury, Green Book) and the approach adopted by Walsh and Brown (1998).
Discount Rates
1.15 NPVs and AEVs are presented on the basis of an 6 per cent discount rate as that is roughly what most farmers would pay for capital. For comparison we also present the figures on the basis of an 8 per cent discount rate, and at the Treasury’s recommended discount rate for assessing the value of investments of 3.5 per cent.
Energy Crops Aid Payment and Set-Aside
1.16 A payment of €45 /ha/yr for energy crops, not grown on set-aside land, was introduced as part of the mid-term review of the CAP - payments commenced in 2004 and, as yet, there is no specified end-date for this policy. The payment of €45/ha/yr is assumed to be maintained throughout the life of the crop. We are thus assuming that the crops are not put into set-aside and that the ceiling
Methodology 25 of 1.5 million ha of energy crops across the EU is not exceeded. Given current political sentiment and the observation that concern with global warming is likely to increase rather than decrease, we assume that political support for energy crops will be maintained to give the same rate of aid as at present.
1.17 The costing of crops on the assumption that they will generally be grown on non set-aside land does require further consideration. First, it should be noted that decoupling significantly reduces the advantage of producing energy crops on set-aside, as farms will no longer lose the support payment associated with conventional crops (in terms of AAPs) if they grow energy crops on non-set- aside land.
1.18 This said, our figures highlight that the gross margins for conventional crops, (e.g. wheat and oilseeds) are, on average, generally greater than those for specialist energy crops. Therefore, the average farmer, would be better off, in the short run at least, growing conventional crops on non-set-aside land and energy crops on set-aside land.
1.19 However, in the longer run (and energy crops are a long term crop) the results suggest that the net margin for energy crops, on average (and assuming minimal fixed costs), are slightly better (although still negative) than wheat or oilseeds. This would suggest that farmers would be more likely to grow them on non set-aside land and take the energy crop payment. In addition it should be noted that the alternative of growing energy crops on set-aside is not just leaving the land fallow because other crops for industrial and non-food uses are permitted. If the difference in profitability between these crops and production on non set-aside land is less that the energy crop payment, again farms would be better off producing on non set-aside land.
1.20 Other factors support the decision to cost on the basis of production on non set-aside land. Small scale planting on set-aside may not allow farms to reduce their fixed costs sufficiently to gain maximum benefit from energy crops (Strawson, 2005). These reductions in fixed costs (assumed in our costings) are important determinants of the profitability of the crops. In addition, the longer term future of set-aside is uncertain and the use of set- aside to encourage alternative land uses is questioned (University of Cambridge, 2006). Therefore for a crop with a sixteen year timeframe it would seem prudent to discount the set-aside effect.
Yield & Revenues (Prices) of SRC and Miscanthus
1.21 Haulage to the end user will evidently vary with distance and the density of the crop, thus penalising SRC compared to Miscanthus.
Methodology 26 1.22 The possibility of growing energy crops on Set-Aside land is not budgeted for in this study because such a crop would not attract the Energy Crops Aid Payment of €45 per ha. However, where there is no alternative industrial crop with a greater net margin, it may be economic to put the energy crop into set- aside, and forego the €45/ha, if the net margin of the energy crop exceeds the aid payment.
1.23 The price for SRC, ex-farm, loaded, of £35/odt represents an estimated value to end users (for co-firing with coal in power stations) of £45/odt. This is a widely quoted figure of the value of SRC chips to end-users, at their sites, (ILEX Ltd, Defra Walsh & Brown, and others) less an estimated £10 per tonne for haulage. It is however more than the £26/odt quoted by ESD Biomass for supply (loaded ex-farm, & index linked) to Didcot power station (it should be noted, however, that the price from ESD Biomass includes harvesting charged at a fixed price of £10/odt, and that they also offer a contract farming agreement where ESD does all the work, takes all risks and pays £95/ha excluding the Energy Crops Aid payment). We thus offer another price scenario, for comparison: £25/odt (loaded, ex-farm) (Table 1B, Annexe II).
1.24 Average yields of 9 odt/ha/yr for SRC were estimated from a sample of 3 harvests where yields had been recorded. It is thus possible that these underestimate the yield which will be achieved in mature crops, as these were all from first harvests. However this figure is in reasonable agreement with the figures quoted by Grower Groups (Renewable Energy Growers Ltd, TV Biomass Coppice, ESD Biomass and Coppice Resources Ltd), and with the figures quoted in our review of the literature. For comparison we present a scenario where yields are 12 odt/ha/yr (Table 1C, Annexe II).
1.25 In the year after planting Miscanthus was estimated to yield 6 odt/ha on the basis of information from 2 growers. It should be noted that one of these crops was planted with a muck spreader which could result in a less well- established crop. However their yields did not differ notably from the crop planted with a Miscanthus planter. Yields from an established plantation are estimated to be 14 odt/ha/yr on the basis of statements from farmers and producer groups. Yields of 14 odt/ha also correspond well with the yields found in the EU Miscanthus Productivity Network. It is however noteworthy that a large trial of Hereford at ADAS Rosemaund has yielded 20 odt/ha/yr over many years - and, as this figure is widely quoted, we also present a scenario where Miscanthus yields are at 18 odt/ha/yr (slightly lower to allow for the better management of trial plots).
1.26 The price presented of £25 per odt for Miscanthus is based on the published budgets for the Winbeg power station at Winkleigh in Devon. This is also roughly equivalent to a price of £35 odt delivered to the straw burning power station at Ely, and is comparable to the current pick-up price of wheat straw at around £25/t.
Methodology 27 Fixed Costs of SRC and Miscanthus
1.27 General overheads were estimated, using the Defra Special Studies methodology, at £87 per ha (Eastern, <40 ESU, Defra). Overheads for Labour, Machinery, and Unallocated Contract are included in the contract costs for land preparation, planting, spraying, harvesting and handling. The fixed costs assigned can thus be viewed the likely minimum level.
1.28 Land charges, or Rental Values, were assessed on the basis of farmer estimated rental value for all land which was not rented or leased. Where land was rented or leased the actual figure for rent was used. The figure is thus the rental value of the whole farm, rather than that of land specifically for energy- crops. The figures used could thus be somewhat higher than the true rental value for land for energy crops, because energy crops are likely to be grown on land of lower quality. Furthermore, landowners might tend to overestimate the rental value of their land. This could explain the difference between the values found in this study (£173 and £159 per ha per year for SRC and Miscanthus respectively), and that for arable land in Eastern England: £143 per ha per year (used in this study to assess the costs of producing arable crops for energy).
1.29 Only one farm, with either Miscanthus or SRC, had any notable investment in buildings for these crops (others used existing storage or areas of hard standing, however these were all fully amortised under the Special Studies methodology and as such no cost could be assigned to the energy crops). In this case it was a large general purpose shed, to be used principally for Miscanthus. Using the Special Studies depreciation charge coefficient of 10% per annum would have resulted in a very large charge to the Miscanthus crop. We thus felt it appropriate to exclude this figure from our results. As no other farm had any notable investment in buildings we do not include a figure for this overhead. However it should be noted that some growers will invest in storage facilities and these may have a substantial cost. For example some may see it as worthwhile providing for covered storage for Miscanthus, and hard standing may be necessary for storage of SRC chips.
Assumptions Underlying Budgets for Arable Crops Used for Energy
Conventional Arable Crops for Energy Uses: Market and Agronomic Considerations
1.30 In order to prepare the budget assumptions, it is first necessary to consider whether conventional arable crops grown for energy can be grown at lower cost than the equivalent feed or industrial crops. Consideration is given to the positioning of commodity arable crops in the marketplace and any differences in the optimum expenditure on inputs.
Methodology 28 1.31 Purchasers of energy crops generally require continuity of supply of raw material, and for this reason, prefer producers to contract their production. However, yields cannot be accurately predicted prior to harvest so the risk of over or under supply must be borne by one party or shared. It may therefore be appropriate that, subject to set-aside restrictions, conventional arable crops will be marketed for feed and industrial use as well as for energy.
1.32 Similar crop attributes are required for energy crops as for conventional feed or industrial arable crops. For example, oilseed rape with above average oil content conventionally receives a premium price and as does sugar beet with a high sugar content. This practice might be expected to continue in the case of energy uses of the same crops.
1.33 Expenditure on seed is likely to be at similar levels to conventional arable commodity crops. Developments in crop breeding present producers with choices between the price of seed and the yield and disease resistance characteristics of the variety. Royalties are lower for older varieties with less favourable characteristics. Seed costs are reduced on many farms by the adoption of home-saved seed. For energy use, mainstream varieties such as Claire, Consort and Riband are favoured for their starch profile. HGCA are funding research into technical specifications of wheat for bioethanol use.
1.34 Fertiliser expenditure, subject to environmental constraints, is similarly unlikely to differ between energy and crops and other uses. Late season nitrogen is regularly applied to milling wheats but this additional cost would be avoided in the case of wheat production for energy.
1.35 Crop protection products are applied to reduce the impact of weeds, pests and diseases that might reduce yield. They are also used on a rotational basis to control weeds cost effectively in the context of the whole rotation rather than within the individual crop. As an example, grass weeds can be controlled relatively inexpensively within a crop of oilseed rape but at greater cost within a following cereal. A final use of crop protection products is to improve the quality or appearance of the harvested crop. In common with many other feed or industrial crops, the quality or appearance of the crop tends to be unimportant and expenditure is generally avoided.
1.36 Arable crops grown for energy may require less expenditure on cleaning, especially if the material removed could be processed for energy use. Storage costs may be lower as energy crops would not need to comply with crop assurance conditions. For example, dedicated energy crops could be stored in buildings used seasonally to house livestock.
1.37 In theory at least, the individual farmer should ensure that labour and machinery is deployed as efficiently as possible, using contractors where necessary. In general terms, the area farmed should not be increased or
Methodology 29 decreased merely to accommodate the existing level of labour and machinery. Following the 1993 MacSharry reform of the Common Agricultural Policy, it became common practice for farmers to produce industrial crops on set aside on a marginal cost basis. In many cases, these farmers would preferably have reduced their labour and machinery complement.
Assumptions Related to Budgets for Conventional Crops
1.38 Costs used in our analysis are based on the Farm Business Survey sample of the Eastern region for the years 2000/01 to 2003/4 inclusive. This is the region in England with the highest density of arable crops and the largest production of cereals. Also, costs for the eastern region are generally very similar, where comparison is possible, to those obtained by the Manchester and Exeter FBS offices.
1.39 Product prices are taken to be “ex-farm” as most agricultural commodities are quoted on this basis and we are examining the “farm level” costs of production. Sugar beet is the exception to this rule as the price is quoted as delivered. However our farm level costs include the cost of beet haulage.
1.40 Land charges were excluded from the budgets of Walsh and Brown (1998). However they represent a real cost. Thus although difficult to estimate, we present figures which are the averages for land in the eastern region for 2000/01 to 2003/04. It should be noted that rental values cannot readily be disaggregated from the single farm payment and issues around average levels of debt (gearing). It should also be noted that sugar beet and potatoes can only be grown on the better land. When such land is rented or leased the charge is higher than for ordinary arable land. It could thus be argued that a higher charge should be incorporated for sugar beet (and for potatoes as our estimate of £156/ha/yr is the value of the whole farm not just the land for potatoes).
Winter Wheat
1.41 Price taken as the average, over the years 2000 to 2003 inclusive, of the weighted average price of feed wheat (Defra, Agriculture in the UK). The estimated yield of 7.93 t/ha, is the average yield of 7.7 t/ha achieved over the entire UK in the years 2000 to 2003 adjusted by 3 per cent to allow for the reduced yields of milling wheat which would not be grown for energy and account for around one fifth to one third of the area of wheat. This compares well to the average Farm Business Survey yield for the Eastern Counties (2000 to 2003/4 incl.) of 8.1 t/ha achieved with wheats grown specifically for both milling and feed or industrial uses.
Methodology 30 Sugar Beet for Ethanol Production
1.42 Price taken as the cost of production of efficient farmers (estimated to be £18/t) plus a margin of £6/t over this cost (RBU; Armstrong Fisher Ltd). This is a delivered price but, in this case, our ‘Misc. Variable Costs’ include beet haulage to the sugar factory.
Oilseed Rape
1.43 Price taken as the average price of oilseed rape sales over 2000-2003 inclusive (Defra, Agriculture in the UK)
Surplus Potatoes
1.44 The assumed yield of surplus potatoes is 46.6 tonnes/ha maincrop (BPC 2005) and the price is £35 per tonne (which equates to the average peeling/ chipping price as reported in the BPC Price Weekly 17 Jan 2005, 27 Sept 2004)
1.45 Miscellaneous variable costs are estimated at 83 £/ha which is the average cost for the 50 per cent of FBS growers with lowest costs. It is assumed that this will exclude those producers who have substantial packaging costs (e.g. bags at about £300/ha), which will not occur for surplus potatoes.
Whole-crop Cereals
1.46 For whole crop cereals an estimated price of £30/t is used, which is the same as the current price for Big Baled Wheat Straw, a possible substitute product for power stations. The yield is estimated as the sum of grain at 7.9 t/ha (as above) and straw at 5 t/ha, although the straw component could be slightly higher due to smaller losses without threshing.
1.47 The fixed cost for machinery has been reduced by around 20 per cent because a baler could be used to harvest this crop rather than a more expensive combine harvester.
Straw Sold with Wheat
1.48 Yield of straw at 5 t/ha @ with a return of £1.5 per 500kg bale are estimates of DTI, Newman (2003). With a grain yield of 7.9 t/ha (as above) at a harvest index of 0.52 (www.hgca.com) equates to a straw yield of about 7.3 t/ha. However much of the dry matter, measured for the harvest index, would remain as chaff and stubble in the field. So the 5 t/ha estimate of DTI, Newman seems reasonable. At 5 t/ha the estimated net returns from straw compare well to the returns from straw predicted by Teagasc (Irish research
Methodology 31 and advisory service) for wheat (30-40 €/ha, www.teagasc.ie, see: cropcostsandreturns).
Implications of CAP reform (Objective 2)
1.49 The second objective was achieved through a detailed review of existing literature on CAP reform (for example, CRER, 2003, SAC 2003 etc). In particular the implications of decoupling, cross-compliance, energy crop payment, single farm payment and set-aside were considered. In addition work by the CRER (2004) at Cambridge has considered the likely development of a number of possible drivers of agricultural land use up to 2015 and this was used to inform this analysis. Available information on the development of the markets for relevant commodities (using projections from institutions such as the OECD, USDA, EU etc) was also analysed.
Uptake at the Farm Level (Objective 3) and Impact on the Farm Business (Objective 4)
1.50 Objectives three and four were achieved through a process of analysis of data on farm level profitability. In addition a suitable generic model for farm-level analysis, developed at the Scottish Agricultural College (SAC) was used to assess the likely uptake of energy crops and the implications for the farm business.
1.51 The model can be calibrated to represent any particular farm situation, in terms of basic resource endowments, and run using Visual Basic for Applications and Microsoft Excel Solver to simulate representative or real farm situations.
1.52 The model was constructed using various sources of data and is designed to examine the impacts of policy change on farm businesses. The model has been used in various studies by Oglethorpe et al to analyse the economic impacts of policy developments on farm businesses, particularly relating to how enterprise substitutions might occur and thus how the agricultural industry may be reconfigured in the light of the relevant policy change. The model incorporates all major cropping and livestock activities carried out on UK farms and can thus be calibrated for all “mainstream” farming types. This is illustrated by its previous use in a large number of different studies where the model has been successfully calibrated to represent a variety of farm situations throughout the UK (from Shetland to East Anglia) and can thus provide good coverage in terms of different farm types or different farm situations.
1.53 The primary objectives of this modelling study and focus of the initial research is to i) evaluate the impact of the current CAP reforms and other potential drivers on relative profitability and, ii) to gain an understanding of the returns necessary to mobilise resources into energy crop production.
Methodology 32 1.54 It is clear that any probable impact will be driven by land use decisions at the farm level, so it is appropriate to use such a farm-level modelling approach. Moreover, since the outcomes will also be driven by decisions made by farmers on a whole farm basis, it is probably not appropriate to examine enterprises in isolation. A high proportion of farms within the UK comprise a mix of arable and livestock production and all-sample averages for the dominant farm types found within the ‘Farm Incomes in the UK’ publication have a mix of arable and livestock to some degree. For these reasons, although the impact on arable sectors will be emphasised, the impacts across the whole farm operation will be analysed, revealing any potential changes in specialisation of production or substitution between cropping and/or livestock activities. In order to provide a timely analysis across a wide range of different farm types and for different sizes and performances it was decided that the models should be calibrated to represent the average situation for just four of the major farm types as reported in the latest published edition of Farm Accounts in England (DEFRA). These are:
• Cereal farms; • Mixed farms; • General Cropping farms; • Cattle & Sheep (Lowland) farms.
1.55 Although only four farm types are considered, each were split into three size groups to enable further analysis of possible differential levels of uptake. This means that effectively 12 farms are considered. A brief description of the farms is presented in Table 2.2
1.56 Within rotational constraints, the simple analysis would be that, all else being equal, in the short run SRC and Miscanthus will have to provide gross margins (equivalents) greater than those found for alternative crops to be adopted and therefore have an impact on farm profitability.
Methodology 33 Table 2.2 Description of Farm Types used in Modelling Exercise Farm Type Size Total Yields as a % Area of the average Farm ed Smal 60 95 l Medi 143 105 Cereals um Larg 392 115 e Smal 90 90 l Medi 125 95 Mixed um Larg 286 110 e Smal 37 85 l General Medi 88 90 Cropping um Larg 359 105 e Smal 80 80
Cattle & l Medi 121 85 Sheep um (lowland) Larg 205 90 e Source Defra Farm Accounts in England
1.57 Once calibrated to represent each of these sample average farm situations, the models were run with the addition of an energy crop option. To provide an analysis of the impact of the current CAP reform on competition or substitution between current and energy crops the models were run with and without direct payments.
The Policy Scenario and Model Assumptions
1.58 Given that much of the work for energy crops is generally undertaken by contractors it is assumed that energy crop do not compete for production factors such as labour and machinery. This means that only gross margins were included into the model.
1.59 Another factor is given that the nature of the crops there are theoretically no rotational constraints for energy crops (willow and Miscanthus). Therefore, our model can allocate a large proportion of land to these crops. Whether or not this would occur in reality, given such issues as the level of risk involved, is discussed in more detail later.
Methodology 34 1.60 The model was originally devised after the MacSharry reforms and therefore incorporates the crop and livestock payments (for example, Arable Areas Payment Scheme, Suckler Cow Premium, Beef Special Premium, Slaughter Premium and Sheep Annual Premium) as a return to the enterprise. To account for the new decoupled situation these direct payments were set to zero. The Dairy Premium is not included in the base situation (as it does not come into operation until 2005) and is therefore not included in the decoupled analysis.
1.61 Environmental compliance schemes were assumed to remain constant. It was also assumed that, set-aside would still be required as a tied compliance measure. Furthermore, the requirement for farmers to ‘keep land in good agricultural condition’ was represented by the constraint that all land must be used for a least some agricultural activity, however extensive, within the model. This includes the ability to allocate arable land to permanent set-aside. This is a major assumption for the model as it means that production will occur on farms even in the longer run when enterprises may not be covering their full costs of production. This assumption is similar to arguing that farmers may not act in an economically rational manner and use the single farm payment to subsidise loss making farming activities.
1.62 However, any likely effect of the SFP on the farm business is not modelled directly, as it would have no direct effect in the model objective function. Hence, whilst the removal of production related-support will change the relative profitability of enterprises (and hence land use) the returned lump-sum decoupled payment will not. The only effect in the model that any recycled decoupled payment might have would be to facilitate capital investment or ease borrowing or cash flow (i.e. through the constraints). This might have different consequences on the farm business depending on which financial quarter the payment is made.
1.63 The simulations also assume that farms of a specific type will remain in that classification. In other words, the available activities for any specific farm type are restricted to those likely to be within the feasible set of activities determined by land type, climate, resource base, market opportunity etc. The base scenario is at 2003 price and direct payment levels.
1.64 The approach adopted was to incrementally increase the returns from energy crop production and assess its impact on the crop allocations within the model. The model does not differentiate whether the higher returns are due to higher prices, better yields, increased support payments or lower costs.
Costs of Energy and Carbon and Energy Balances
1.65 The methodology used to attain estimates of costs of energy, level of emissions, energy requirements and carbon balances involved combining the
Methodology 35 detailed crop costings from this study with available published information. For energy and GHG values for Biomass the main source was Elsayed, et. al. (2003). Rickeard et. al. (2004) was used for information on the production of ethanol from wheat. Whilst information on energy and GHG data for bioethanol from sugar beet and biodiesel from rapeseed came from from the Concawe Report (2003). Finally energy and GHG data for ethanol from wheat straw were derived from Woods and Bauen, (2003).
1.66 Having examined the methods used to achieve the objectives set for this study, the next three chapters present the results of the analysis. First, estimates of the costs of production at the farm level and possible implications of CAP reform are analysed. Then the implications for the farm business are considered, before results pertaining to wider issues such as the cost of energy and energy balances are presented.
Methodology 36 3. RESULTS: COSTS OF PRODUCTION
Introduction
1.1 The previous chapter has highlighted the methodology used in this study to achieve the set objectives. This and the next two chapters present the results of our analysis. For ease of exposition the results have been broken up in line with the set objectives. Therefore in this chapter the costs of production for the various crops for energy are presented, followed by an analysis of the implications of CAP reform. Chapter 5 assesses the likely adoption of energy crop production on farms and possible impacts on farm profitability. Chapter 6 concludes the results through reporting the findings in relation to overall costs of energy and energy balances.
Costs of Production
1.2 The costs of production are based on the results of the energy crop survey (described in Chapter 2), farm survey results for conventional crops and budgeted estimates. In the absence of detailed lifecycle information and long term yield performances we present budgets (based on survey finding and imputed data where no information was available) for the production of SRC and Miscanthus.
1.3 Table 3.1 presents the survey findings for production costs of SRC and Miscanthus fitted to a 4 year budget because most of the data was on this timescale. As mentioned in the previous chapter, the survey is not definitive due to the relative scarcity of energy crop enterprises in England, but also due to the fact that few enterprises have been operating sufficiently long to have detailed harvest information (both yield and costs). Standard deviation figures in the Table highlight the variation around the mean, whilst in the following discussion of the individual cost sectors the numbers of growers providing information is highlighted. Together these give some indication of the reliability of the results and where the areas of uncertainty lie.
Costs of Production 37 Table 3.1: Survey Findings: - Short Rotation Coppice and Miscanthus¹ (all £/ha, except yields) Short Rotation Coppice Miscanthus Establishment Costs Year Yr0 Yr1 Yr2 Yr3 Yr0 Yr1 Yr2 Yr3 Planting Material 709 ---² (130) Planting 284 1518 (59) (371) Ground preparation 132 117 (57) (69) Sprays and Spraying 114 56 (Pests & Weeds) (97) (39) Cutback at end of first 33 year (5.3) Total 1273 1691
Periodic Variable Costs Contracting - harvest 311 92 92 92 (n=2 )
Yield, odt 27 6 (1.3)
Fixed Costs Overheads Rental Value 173 173 173 173 159 159 159 159 (59) (42)
Fixed Costs (Included in Estab. & PVC's) Machinery - Tractors 43 41 52 (45) (46) Machinery - Implements 13 16 (13) (8) Labour (hours) 6 (8) 6.4 3.4 2.8 2.8 2.8 (2.3)
Planting Details Planting Density, cuttings 15,350 13,950 / ha (2,580) (5,030 ) Cost of cuttings, pence 4.6 13 (8)³ per plant (0.9) ¹ Figures in blue italics are based on limited data: Figures in parentheses are Standard Deviations ² Cost of Planting Material for Miscanthus is included in Planting Cost ³ The cost per rhizome is based on five farms where this information was available. The costs on these farms were thus greater than on those farms where the cost of plants was included in the cost of planting.
1.4 As this study presents the first attempt to survey energy crops in England, the following section examines the types and levels of costs found at different stages of the production process.
Costs of Production 38 Planting Costs of SRC and Miscanthus
General
1.5 The sample on which this summary is based consisted of 23 farms (n=23) with Short Rotation Coppice (SRC) - all willow - and 16 (n=16) farms with Miscanthus crops. Some farmers were unable to provide details of all the costs that this included and only 7 SRC farms and 2 Miscanthus had harvested anything, as yet. The majority of farms had all work, except land preparation, done by grower groups or contractors, meaning that ‘labour and machinery’ fixed costs for planting and harvesting could not be apportioned to the SRC/Miscanthus. There was no limit on the planting date for the crops included in this study, the longest established crop was planted in 1996.
1.6 Planting and other establishment costs for SRC and Miscanthus are shown in table 4.1. The average total cost for establishment was £1273 for SRC and £1691 for Miscanthus. The cost of planting material for Miscanthus could not be separated from the planting cost as most farmers had contracted for the whole operation, including the cost of planting material and some sprays.
1.7 For SRC, most farmers gave a figure of 15,000 cuttings per ha as their target density, however there was some variation around this figure. The average figure given is thus not the same as the typical figure for the industry. The cost per cutting was calculated by dividing the average cost of planting material by the average planting density.
1.8 For SRC the cost of planting material was available (£709, n=5) and this could be separated from the cost of planting (£284, n=4). However most growers came from the Arbre scheme and could not separate their planting material and planting costs. This led to an average figure of £855/ha (n=15) for planting, including planting material, but this is biased downward by the refund of payments by Arbre when it failed and breached its contracts with the growers.
1.9 With Miscanthus, the most common planting density was 10,000 rhizomes per hectare, however several were substantially higher - the mean figure of 13,950 presented is based on 17 crops. The cost per rhizome, of 13 pence each, is based on the five farms where a cost per rhizome was supplied. This includes one where a higher cost might have been incurred as the crop was primarily for planting material.
1.10 Planting costs for Miscanthus (£1,518, n=13) are presented including the cost of the planting material, as this is the basis on which it was contracted by most farmers. Planting costs excluding planting material were available from
Costs of Production 39 insufficient growers for estimation (n=3). Some Miscanthus crops are planted by the growers themselves using suitable muck spreaders.
Ground Preparation
1.11 This is the one area where both SRC and Miscanthus growers could confidently provide figures for their costs. These are summarised in Table 3.2. It is an operation that almost all undertook and for which costs are well known, as the operation is done often. Included in the Planting and Ground Preparation are costs for tractors and implements, as well as time for farm labour.
Table 3.2: Summary of Ground Preparation Costs Crop Tractor costs Implement costs Farm Labour (£/ha) (£/ha) (h/ha)
SRC 43 13 6
Miscanthus 52 16 3.4
Rabbit Fencing for SRC
1.12 In earlier work by Walsh and Brown rabbit fencing was presented as a major cost of production. However, in our survey only 2 farms had costs for rabbit fencing out of the 23 surveyed. It should however be noted that part of the Arbre planting contract price included rabbit fencing, where necessary. Given this frequency and the likely costs we consider that the average figure of £173 /ha presented by Walsh and Brown might be an over-estimate. But, where rabbit fencing is required, a substantial cost should be accounted for.
Cutback at end 1st year - SRC
1.13 The cost of £33 /ha is based on a sample of only 5 farms but is considered to be realistic.
Sprays:
1.14 A range of herbicides were typically applied to Miscanthus, including Gramoxone, MCPA, Starane, Stomp, atrazine, glyphosate, and Plinth and the insecticide, Dursban. The cost of these are included under Establishment Costs - £59/ha (n=13). These are in addition to the cost of herbicides sprayed by agreement with producer groups.
1.15 For SRC spraying costs totalled £114/ha (n=17). Herbicides included Gramoxone, Stomp, glyphosate, Falcon and Dow Shield. Willow beetles were
Costs of Production 40 a particular problem, in several cases, for which farmers often sprayed with Hallmark. The insecticide Dursban was also used. The higher costs than for Miscanthus could reflect the inclusion of some spray costs in the producer groups planting charge for Miscanthus.
Fertilisers
1.16 Fertilisers (excluding manures) were not generally applied to either SRC or Miscanthus, even at planting. A handful of growers did, however, apply substantial amounts (>£50/ha). Thus, like rabbit fencing, generally this cost is not incurred but where it is incurred it can be substantial and should be accounted for. Very rarely farmers applied trace elements to land for Miscanthus (manganese, copper, magnesium and zinc), if it was considered very poor. Owing to the small number, and consequent uncertainty, this cost has likewise not been included in our budget.
1.17 Manures were sometimes applied to SRC and Miscanthus crops (we recorded 4 SRC and 1 Miscanthus crop as having had manures applied). However the farmers listed this as free of charge as it was supplied and spread by utilities, as compost or composted sewage sludge. We thus do not include a charge for manures.
Harvesting, Handling & Ex-Farm Costs:
1.18 The harvesting cost of £92 per hectare is based on very limited numbers (3 harvests on 2 farms) for Miscanthus. However, this is likely to be a representative figure because it is close to the cost of harvesting forage maize, which many other farmers quoted as their estimate for future Miscanthus harvests. Marketing, Handling and Drying (storage) costs are one of the most difficult to estimate as almost no records in the survey had any breakdown for these costs: estimates ranged widely and often the estimated costs of storage and handling were deducted to give a net, anticipated, price for the crop. In the Miscanthus budget we estimate £4 per oven dry tonne (odt) for storage and handling and around £3.20 per odt for loading and marketing (including weighbridge charges and moisture testing).
1.19 The estimated cost of £311 per hectare for contract harvesting of SRC is based on a sample of 6 farms. One further farm had harvested but the data was excluded as an outlier - the crop had grown for 5 years, was 35-40 foot tall and 6 inches in diameter - it took an unduly long time and high cost to harvest. Handling, Drying (and Marketing) costs are, again, the most difficult to estimate - we estimate £6/odt for Handling and Drying, and £5/odt for Marketing costs (loading, weighbridge, and quality testing charges).
Costs of Production 41 Grubbing Up
1.20 Grubbing up is costed at contract rates of £100/ha and involves spraying once with glyphosate and power rotavating twice (with a forestry specification machine), for both SRC and Miscanthus. Grower groups for both crops report that it is relatively easy to restore land to spring sown crops after cropping with Miscanthus or SRC. This is based on experience in the UK and also from experience abroad. The budgeted costs of this operation are subject to some debate, however it should be emphasised that varying the grubbing up costs does not have a large impact on the returns or costs per tonne because these costs fall at the end of the project.
1.21 There is anecdotal evidence concerning possible detrimental impact of energy crops on field drains. However, no evidence was found of costs of re-instating drains and therefore this cost has not been included in our budgets
1.22 In addition to quantifiable evidence the survey of producers did produce anecdotal evidence relating to energy crop production. For completeness the key findings are reported in the next section
Anecdotal Evidence from the SRC and Miscanthus Survey
1.23 Many willow growers, who were formerly in the Arbre scheme, indicated that they had harvested willow (some as long as 6 months ago) that was just sitting in fields. Many were not sure how they would get the willow removed. Some growers have unharvested willow left in fields that is growing too big. They, similarly, do not know how they can get it harvested - “[willow] is now as thick as the harvesting equipment can tackle and there seems little likelihood of any power station coming on line in the next 2 or more years”. Many feel let down - “Very disappointed with the scheme; planted crops and the power station at Eye did not materialise. Now have crops and nowhere to send them”. However, others seemed confident that a market will emerge even if there currently is none.
1.24 Some growers indicated that they felt there was a “lot of talk and not a lot of action” and that growers should be looking more into local incentives such as supplying fuel for hospitals rather than relying on power stations. Others felt that it would make more sense to have small, heavily granted producers groups with small power stations on the farm. A few growers are turning to alternative enterprises such as using crops to supply heating for housing projects / conversions / heating plants / offices on the farm and/or electricity. This usually involves buying their own generator and grinder, but some farmers feel that this is the best solution.
1.25 Willow was noted as a benefit on some farms where there is difficult land. It was said to be particularly good at absorbing leachate and water on land prone
Costs of Production 42 to flooding (that could not be used for arable production) - “takes more moisture than arable crops - 22,000 gallons an acre”. Is also good for restoring land from former land-fill or extraction sites.
1.26 Most farmers did not have to buy any new equipment in setting up their crops (most work done by specialist equipment owned by contractors or producer groups) and any storage areas required were mainly concrete pads already available on the farm. Another benefit observed was that fertiliser usually came in the form of sewage sludge supplied and applied free of charge.
1.27 Willow also good for deer (Roe deer, Red deer and Muntjac had been noted). Most growers have seen a real increase in the amount of wildlife, particularly birds. One farm worked with the RSPB and reported 63 species of birds on their willow planted land and only 16 on other parts of the farm where there was no willow or CSS.
1.28 Some worried about exit costs after the lifespan of the crop – the land will need draining and the roots can cause expensive blockages of drains.
1.29 The majority of farmers interviewed - ie. those with SRC or Miscanthus - were happy in principle to plant willow or Miscanthus as they saw it had benefits to the environment and as such, was a good form of diversification. It is also generally seen as a relatively easy crop to manage. However, many felt that they had not been supported and felt that the lack of markets for their crops was a big concern.
1.30 This section has highlighted the observed costs for SRC and Miscanthus as found in the survey and anecdotal evidence. However, it is clear that areas of uncertainty exist, due to lack of information on yields and harvest costs in particular. The next section uses the available costs, and also budgeted information, to provide estimates of the overall costs and returns of energy crop production. The detailed assumptions underlying these budgets have been described in the previous chapter.
Budgets: Returns from SRC and Miscanthus
1.31 Tables 3.3 to 3.6 present returns from SRC and Miscanthus, in the presence and absence of existing Subsidies and Land Charges, and at the three discount rates discussed in the previous chapter (3.5, 6 and 8 per cent). The fact that certain assumptions have to be made in the budgeting process (based on detailed analysis of available information) means that it is important that the impacts of varying these underlying assumptions on our results is assessed. Therefore, returns for the crops under scenarios of higher yields, lower planting costs and, for SRC only, lower prices are also presented. The use of a lower price for SRC reflects the fact that whilst current evidence suggests that there is a price differential between SRC and Miscanthus (of £10/odt) this
Costs of Production 43 might not be sustainable into the long run as they have similar energy values when burnt.
1.32 It can be seen that SRC as an energy crop is marginally profitable, at current prices, if land charges are ignored and subsidies are included (Table 3.3). It should however, be noted that the fixed costs assumed for these crops represent a minimum (because it is assumed that all fixed costs for labour, machinery and unallocated contract are included in the contract costs for planting and harvesting). However, if subsidies are excluded, the returns from SRC are negative at any of the discount rates considered. (Table 3.3). Energy crop subsidies, for the purposes of this discussion, include the planting grants from the Energy Crops Scheme and the (CAP) Energy Crops Aid (see “Legislative Environment” in Chapter 1.).
1.33 By contrast Miscanthus, at the price and yields assumed, does not achieve a positive net margin under any scenario, except marginally under that of excluding land charges at the lowest discount rate (Tables 3.5 and 3.6). However if a yield of 18 odt/ha/yr is assumed, the net margin is positive if land charges are excluded (Appendix II Table 2.B).
1.34 The results highlight the importance of our price assumptions as the higher returns for SRC compared to Miscanthus are generated by the higher price (£35/odt rather than (£25/odt). As we will see in the next section production costs are actually lower for Miscanthus.
Table 3.3: Gross Margins from SRC (2004 £/ha) Standard Subsidies Yields Price of Planting (Incl. Excluded of 12 £25 /odt Costs Subsidies) odt/ha/yr (ex-farm) Lower NPV @ 8% 871 -415 1441 159 1165 AEV @ 8% 91 -43 151 17 122 NPV @ 6% 1035 -286 1694 212 1329 AEV @ 6% 97 -27 158 20 124 NPV @ 3.5% 1293 -83 2094 292 1586 AEV @ 3.5% 103 -7 167 23 127
Table 3.4: Net Margins from SRC (2004 £/ha) Standard Subsidies Yields Price of Planting Land (Incl. Excluded of 12 £25 /odt Costs Charges Subsidies) odt/ha/yr (ex-farm) Lower Excluded NPV @ 8% -1614 -2901 -1045 -2326 -1321 40 AEV @ 8% -169 -303 -109 -243 -138 4 NPV @ 6% -1750 -3071 -1091 -2574 -1456 103 AEV @ 6% -163 -287 -102 -240 -136 10 NPV @ 3.5% -1962 -3337 -1161 -2963 -1668 204 AEV @ 3.5% -157 -267 -93 -237 -133 16
Costs of Production 44 Table 3.5: Gross Margins from Miscanthus (2004 £/ha) Standard Subsidies Yields of Planting (Incl. Excluded 18 Costs Subsidies) odt/ha/yr Lower NPV @ 8% 605 -571 1247 1373 AEV @ 8% 63 -60 130 144 NPV @ 6% 806 -405 1542 1574 AEV @ 6% 75 -38 144 147 NPV @ 3.5% 1119 -146 2005 1887 AEV @ 3.5% 89 -12 160 151
Table 3.6: Net Margins from Miscanthus (2004 £/ha) Standard Subsidies Yields of Planting Land (Incl. Excluded 18 Costs Charges Subsidies) odt/ha/yr Lower Excluded NPV @ 8% -1746 -2923 -1105 -978 -226 AEV @ 8% -183 -306 -116 -102 -24 NPV @ 6% -1829 -3041 -1093 -1061 -126 AEV @ 6% -171 -284 -102 -99 -12 NPV @ 3.5% -1960 -3226 -1074 -1192 30 AEV @ 3.5% -157 -258 -86 -95 2
1.35 Although our costings have been undertaken on the basis of the crops not been grown on set-aside and therefore been eligible for the energy crops payment, it is of some interest to consider the impact on the returns. In effect the removal of the payment reduces the AEV for SRC and Miscanthus by £30 and £27, respectively. The NPV, assuming standard assumptions and 6 per cent discount rate, falls by around £321 and £296 for SRC and Miscanthus, respectively in the absence of the payment.
Production Costs of SRC and Miscanthus
1.36 Average variable costs of production are roughly equal to the likely market prices for both SRC and Miscanthus. Average total costs of production, even with minimal fixed costs, are much greater than the market prices for both SRC and Miscanthus. The situation is improved somewhat in the ‘High Yields’ scenarios however the total costs per oven dry tonne (odt) remain greater than the likely market prices.
Table 3.7: Production Costs of SRC - Standard Assumptions (2004 £/odt) Discount Discount Discount Rate 8 % Rate 6 % Rate 3.5 % Variable Production costs (AEV £/ odt) 36.0 35.1 34.0 Fixed Production costs (AEV £/ odt) 30.8 30.8 30.8 including Land Charges of (AEV £/ odt) 20.5 20.5 20.5 Tot. Production Cost (Tot. AEV costs/ odt) 66.9 65.9 64.8
Costs of Production 45 Table 3.8: Production Costs of SRC - High Yields (12 odt/ha/yr) (2004 £/odt) Discount Discount Discount Rate 8 % Rate 6 % Rate 3.5 % Variable Production costs (AEV £/ odt) 29.5 28.8 28.1 Fixed Production costs (AEV £/ odt) 23.1 23.1 23.1 including Land Charges of (AEV £/ odt) 15.4 15.4 15.4 Tot. Production Cost (Tot. AEV costs/ odt) 52.6 51.9 51.2
Table 3.9: Production Costs of SRC - Lower Planting Costs, Standard Yields (2004 £/odt) Discount Discount Discount Rate 8 % Rate 6 % Rate 3.5 % Variable Production costs (AEV £/ odt) 32.4 31.8 31.2 Fixed Production costs (AEV £/ odt) 30.8 30.8 30.8 including Land Charges of (AEV £/ odt) 20.5 20.5 20.5 Tot. Production Cost (Tot. AEV costs/ odt) 63.2 62.6 62.0
Table 3.10: Production Costs of Miscanthus - Standard Assumptions (2004 £/odt) Discount Discount Discount Rate 8 % Rate 6 % Rate 3.5 % Variable Production costs (AEV £/ odt) 27.9 26.6 25.1 Fixed Production costs (AEV £/ odt) 19.9 19.9 19.9 including Land Charges of (AEV £/ odt) 12.8 12.8 12.8 Tot. Production Cost (Tot. AEV costs/ odt) 47.7 46.5 45.0
Table 3.11: Production Costs of Miscanthus - High Yields (18 odt/ha/yr) (2004 £/odt) Discount Discount Discount Rate 8 % Rate 6 % Rate 3.5 % Variable Production costs (AEV £/ odt) 23.0 22.0 20.9 Fixed Production costs (AEV £/ odt) 15.5 15.5 15.5 including Land Charges of (AEV £/ odt) 10.0 10.0 10.0 Tot. Production Cost (Tot. AEV costs/ odt) 38.5 37.5 36.4
Table 3.12: Production Costs of Miscanthus - Lower Planting Costs, Standard Yields (2004 £/odt) Discount Discount Discount Rate 8 % Rate 6 % Rate 3.5 % Variable Production costs (AEV £/ odt) 21.4 20.8 20.2 Fixed Production costs (AEV £/ odt) 19.9 19.9 19.9 including Land Charges of (AEV £/ odt) 12.8 12.8 12.8 Tot. Production Cost (Tot. AEV costs/ odt) 41.3 40.7 40.0
Break Even Analysis
1.37 Following on from this analysis, it is of some interest to examine the level at which energy crops would break-even (in terms of achieving a net present value equivalent to zero). Tables 3.13 and 3.14 present the level of price, yields, energy crop payment, establishment grant and rent necessary to achieve break even.
Costs of Production 46 Table 3.13 Comparison of break-even levels with standard assumptions SRC Standard Break even Difference assumption levels Price £/odt 35 56 21 Yield t/ odt/ha/yr 9 17 8 Energy Crop Payment £/ha 30 193 163 Establishment Grant £/ha 1000 2750 1750 Rent £/ha 173 10 -163 Based on assumption of 6 per cent discount rate
Table 3.14 Comparison of break-even levels with standard assumptions Miscanthus Standard Break even Difference assumption levels Price £/odt 25 40 15 Yield t/ha 14 25 11 Energy Crop Payment £/ha 30 218 188 Establishment Grant £/ha 920 2749 1829 Rent £/ha 159 -12 -171 Based on assumption of 6 per cent discount rate
1.38 Whilst of course break even may be achieved by a combination of improved prices, lower costs, higher grants etc it is still valid to view the extent of change necessary in each of the categories in isolation. The tables do highlight the large changes necessary (although generally lower for SRC than Miscanthus) for the crops to break even under the assumptions used in this study.
Straw and Prices for Biomass Crops
Straw prices are likely to set a ceiling price for biomass crops in areas with substantial straw production, especially for Miscanthus which can be burnt in the same facilities as straw. Currently straw prices (around £25 to £30 per tonne ex-farm) are insufficient to outweigh the inconvenience of having straw collected in straw producing areas. This means that many farmers chop the straw and plough it in - which maintains the balance between demand for industrial uses, animal bedding, carrot cover, etc. and the supply of straw. The straw burning power station at Ely experienced difficulties obtaining sufficient supplies close to the station, and had to provide an integrated baling and transport service to ensure supplies (at one time they had to import straw from the continent, according to one anecdote). At these prices farmers are unlikely to find Miscanthus production attractive, except where higher value markets are available.
Uncertainties Surrounding Estimated Costs and Returns
1.39 As implied above there our some key uncertainties relating to the costs and returns for energy crops that may alter our conclusions and these require further examination. In terms of the underlying analysis, the results from the survey would make us reasonably confident in the current establishment costs
Costs of Production 47 associated with production. Estimated yields are clearly more uncertain as relatively few crops in the UK have reached maturity. However, by varying the yields and costs of production we have shown that even with substantially higher yields or lower costs our underlying finding that the crops produce a negative net margin is maintained. Therefore it may be argued that these uncertainties do not fundamentally alter our results and that the conclusions in this sense our robust.
1.40 This section has considered the actual and budgeted costs and returns from SRC and Miscanthus based on the best available information. The next section considers the costs and returns associated with conventional arable crops that can be used for energy. Again the detailed assumptions underlying these budgets have been described in the previous chapter.
Budgeted Returns from Arable Crops for Energy
1.41 Budgets for the production of winter wheat, sugar beet and oilseed rape are shown in Table 3.15 (below). Similar budgets for surplus potatoes, whole crop cereals for energy production, and straw sold with wheat are shown in Table 3.16. On the basis of the feedstock cost for energy, it would appear that firing of whole-crop cereals would be the most efficient. However when one compares this to the domestic price for gas of around 2 p/kWh it is clear that this is not an economic proposition. The energy balances are also likely to be very unfavourable because wheat crops require substantial applications of fertilizers (principally nitrogen) and crop protection products.
Costs of Production 48 Table 3.15: Budgets for Conventional Arable Crops with Energy Uses £/ha Winter Sugar Oilseed Rape Wheat Beet Variable Costs Seed 36.5 137.1 28.1 Sprays 117.1 126.1 95.9 Fertilisers 82.3 134.7 84.4 Contract 4.0 128.5 7.3 Casual Labour 0.8 2.3 0.6 Misc. Var. Costs 10.0 200.0 4.6
Total Variable Costs (£) 251 729 221
Revenues Price £/tonne 69.5 24.0¹ 145.2 Yield, tonnes 7.93 52.9 3.6 Net Revenues from Straw (£/ha) Total Revenues from Sales 551.2 1269.6 525.6
Gross Margin (excluding subsidies) 301 541 305
Fixed Costs Overheads Labour 100 100 100 Machinery & Power 173 173 173 Other Overheads 70 70 70 Rental Value 142 142 142 Unallocated Contract 32 32 32
Total Fixed Costs 517 517 517
Total Costs 767 1245 738
Net Margin (excluding subsidies) -216 24 -212
Variable Production costs (costs/ t yield) 32 14 61 Fixed Production costs (£/t) 65 10 143 including Land Charges of (£/t) 18 3 39 Tot. Production Cost (Tot. costs/ t yield) 97 24 204
Est. BioFuel Yield (l/t produce)² 350 100 420 oil (not RME) Fuel Yield per ha 2776 5290 1520 Total Cost of Feedstock / litre fuel (pence/l biofuel ex-farm) 28 24 49 Total Cost of Feedstock / GJ energy (£/GJ ex-farm) 13.0 11.1 14.9 ¹. Figures in Red Italics are imputed. ² IPTS 2002/IEA 2004, IC
Costs of Production 49 Table 3.16: Budgets for Other Arable Crops with Energy Uses Surplus Whole-Crop Wheat + Potatoes Cereals Straw Variable Costs Seed 607.7 36.5 36.5 Sprays 326.7 117.1 117.1 Fertilisers 189.9 82.3 82.3 Contract 139.5 4.0 4.0 Casual Labour 121.4 0.8 0.8 Misc. Var. Costs 83.1 10.0 10.0
Total Variable Costs (£) 1468 251 251
Revenues Price £/tonne 35.0¹ 30.0 69.5 Yield, tonnes 46.6 12.9 7.93 Net Revenues from Straw (£/ha) 15.0 Total Revenues from Sales 1631.0 387.9 566.2
Gross Margin (excluding subsidies) 163 137 316
Fixed Costs Overheads Labour 191 100 100 Machinery & Power 250 138 173 Other Overheads 92 70 70 Rental Value 156 142 142 Unallocated Contract 41 32 32
Total Fixed Costs 729 482 517
Total Costs 2197 733 767
Net Margin (excluding subsidies) -566 -345 -201
Variable Production costs (costs/ t yield) 32 19 - Fixed Production costs (£/t) 16 37 - including Land Charges of (£/t) 3 11 - Tot. Production Cost (Tot. costs/ t yield) 47 57 -
Est. BioFuel Yield (units/t produce)² 100 l 1 t Fuel Yield (l / ha) 4660 12.9 t/ha Feedstock Production cost (pence/l biofuel ex-farm) 47 Feedstock Production cost (£/GJ ex-farm) 22.2 4.0 ¹. Figures in Red Italics are imputed. ² IPTS 2002/IEA 2004, IC
Costs of Production 50 Discussion of Returns from Crops for Energy
1.42 It is of some interest that our budgeted figures show that after decoupling the average fully costed returns from all our crops for energy are negative. This does raise the question as to the extent that producers will continue to produce existing commodities let alone new crops. However, it is necessary to consider that farmers may continue to produce crops, even when negative net margins are achieved. Further, it is appropriate to consider the variation in production costs between producers and the ensuing impact on production. These issues are considered in the following paragraphs.
1.43 Producers will need to give consideration to the level of fixed costs that they will unavoidably incur in meeting environmental and social responsibilities that are implicit with land occupation. These, together with an element of land occupation costs, may arguably, be offset by receipt of Single farm Payment. Subject to continued receipt of Single farm Payment, some farmers may choose to accept a small negative net margin from crop production if this provides a more favourable return than maintenance of land in Good Agricultural and Environmental Condition (GAEC).
1.44 It is possible that producers will use the Single Farm Payment to subsidise unprofitable production, in the hope that prices will improve in the longer term. They may wish to continue to farm for personal reasons. Sources of non-agricultural income have historically been used to subsidise unprofitable agricultural enterprises.
1.45 The budgeted average cost of crop production ignores the variation in performance between producers. The survey results and budgets derived from the survey results are those resulting from past subsidy mechanisms. Due to receipt of area payments, farmers were able to return a positive net margin for the crops produced. The average net margins presented above simplistically show crop production without support and a consequent negative net margin. The most profitable crop producers tend to produce higher yields, often at below average cost, and potentially grow crops with a positive net margin. These points are considered further in Section 4.
1.46 Although not directly comparable, due to the high use of contractors for energy crops, gross margins are much greater for the conventional arable crops than for either SRC or Miscanthus (Tables 3.3, 3.5, 3.15 and 3.16). Winter wheat with sale of straw produces a gross margin of £316/ha compared to £97/ha for SRC (and £-27/ha if subsidies are excluded) and £75/ha for Miscanthus (and £-38/ha if subsidies are excluded).
1.47 The higher fixed costs included in the arable crops budgets mean that the net margins are somewhat lower for wheat and oilseed rape than the energy crops, if subsidies are included. On this basis SRC offers a return of -£163/ha (-
Costs of Production 51 £287/ha without subsidies) and Miscanthus offers a return of around -£171/ha -(£284/ha without subsidies). This compares with net margins, without subsidies, of -£201/ha and -£212/ha for wheat with straw and oilseed rape.
1.48 The returns from whole-crop cereals for combustion and surplus potatoes for ethanol are much lower than the corresponding returns from wheat or food potatoes. The estimated gross margin for whole-crop cereals is only £137/ha and that for surplus potatoes is £163/ha. Surplus potatoes might be priced at the cost of haulage alone, however this would make their production even less economic. It is possible that a multi-input processing plant might be able to use surplus potatoes as well as wheat and or sugar beet, thus making it economic to buy surplus potatoes and lowering the cost of the ethanol produced (no one would build a stand-alone surplus potatoes plant because of the lack of continuity of supply). However this is hypothetical. These products are thus not considered further in this study.
1.49 A scenario of lower costs of planting and planting materials is likely to occur if the SRC or Miscanthus industries expand greatly. Anecdotal evidence from survey participants, including both suppliers and users of energy crop establishment services, suggests that crop establishment costs would be expected to reduce over time. The costs of contract planting captured in the survey reflect the high costs of developing planting technology and the relatively small areas of crops planted by machines that offer capacity to cover larger areas of land. A further example of the possibility that planting costs will reduce over time is that some Miscanthus was planted using custom built planters but there were also observations of farmers using muck spreaders (see paragraph 3.5) to carry out the same task. Much of the plant material was purchased at relatively high cost. The cost would be expected to fall as supply increases. Due to the lag between crop establishment and harvest, relatively small changes in crop establishment costs are amplified when expressed on an AEV basis. However, on their own, lower costs of planting material and planting for SRC and Miscanthus, while making Miscanthus around £70/ha more profitable and SRC around £30/ha more profitable, do not alter the conclusion that the energy crops, on average, make a negative return.
Reed Canary Grass and Switchgrass
1.50 In addition to Miscanthus and SRC there are clearly other available crops for energy production. This section briefly examines the available evidence on their costs and returns. The DTI “Topgrass” trials have some cost and yield results for reed canary grass. However the costs, presented in Table 3.17, are estimates taken from Nix (Farm Management Pocket Book) largely because it is not possible to estimate land preparation, seeding and other crop management costs from trial plots. John Amos & Co have planted a trial crop of reed canary grass. However, although they do not as yet have any yield data from harvests, their costs so far are similar to those estimated by IACR- Rothamsted. The operations for sowing reed canary grass are standard
Costs of Production 52 operations for sowing any small seeded grass (RCG has a seed mass of 0.76 mg per seed) so these costs are likely to be relatively robust.
Table 3.17: Estimated Planting Costs of Reed Canary Grass (£/ha) Operation IACR-Rothamsted (DTI, “Topgrass”) Plough, Cultivate & Roll 63 Power Harrowing 24 Drilling 17 Seed Cost 93 Rolling 11 Spraying (x3) 45 Total 253
1.51 Switchgrass trials have been planted by IACR-Rothamsted as part of the DTI “Topgrass” trials. However establishment for these was poor in several cases (for which no results were presented) and the costs of establishing the plots were estimates taken from Nix (Farm Management Pocket Book). Similarly John Amos & Co planted a field scale trial of switchgrass, which failed to establish. There is thus no real experience of costing switchgrass production at a field scale.
1.52 Having examined the costs of production associated with crops for energy, it is necessary to consider the implications of the recent CAP reforms on the agricultural sector as these may have a significant impact on our findings.
Implications of CAP Reform
1.53 Land use in England and Wales is dominated by the production of commodities that are subject to significant support through the CAP. Therefore reform of the CAP will play a major role in the development of land use and is the focus for this section. Table 3.18 highlights the proposed reforms of the CAP. Although there are clearly a number of aspects to the reform, it is the introduction of the Single Farm Payment, and the subsequent decoupling of farm support, that will have the main impact on land use.
1.54 In addition to the known reforms, a further issue relates to the recently agreed reform of the sugar sector. As virtually all current production of sugar beet occurs under this regime any reforms have the potential to significantly affect the likelihood of production. The agreed proposals are summarised below:
A 36 percent price cut over four years beginning in 2006/07 to ensure sustainable market balance (-20 percent in year one, -27.5 percent in year two, -35 percent in year three and -36 percent in year four).
Farmers will receive compensation to offset the impact of the price cut. This will be set at an average of 64.2 percent of the final price cut
Costs of Production 53 Inclusion of this aid in the Single Farm Payment and linking of payments to respect for environmental and land management standards.
In those countries giving up at least 50 percent if their quota, the possibility of an additional coupled payment of 30 percent of the income loss for a maximum of five years, plus possible limited national aid.
Validity of the new regime, including extension of the sugar quota system, until 2014/15. No review clause.
Merging of ‘A’ and ‘B’ quota into a single production quota.
Abolition of the intervention system after a four-year phase-out period and the replacement of the intervention price by a reference price.
Introduction of a private storage system as a safety net in case the market price falls below the reference price.
Costs of Production 54 Table 2.2: CAP Agreement Implementation In England And Wales Feature England Wales Decoupling CAP support payments are no longer linked to production. Decoupled, but recipients must be ‘farming’. Cross Compliance Land must be kept in ‘good agricultural and environmental condition’ (GAEC). 2m Claimant must ‘currently be farming’ in addition buffer strips around hedges and water. Soil management plans to prevent erosion and to GAEC. Under consultation. Farmers will also maintain soil structure. Permanent pasture to be reduced by less than 5% of total agric have to meet existing environmental, health and area, except for environment friendly afforestation. No trimming of hedgerows 1 welfare conditions set out in 18 EU Directives March to 31 July. All or part of set-aside may put in 6-10m strips next to water, and Regulations. EU may specify indicators. hedges, woodland and special sites. Land must be able to be returned to cultivation by the next growing season at the latest. Should increase the sustainability of agriculture and the environmental performance of farmers. Farmers will also have to meet existing environmental, health and welfare conditions set out in 18 EU Directives and Regulations. EU may specify indicators. Allocation of Entitlements 90% Historic tapering to 100% Area based by 2012. “Precise entitlement allocations Historic basis only will not be known until all applications have been received and analysed”. Dairy Payments will be decoupled based on quota held or leased on 31/3/2005 and will be Payments will be decoupled based on quota held included in the historic payments (i.e. will be phased out) or leased on 31/3/2005 and will be paid in full with the historic payments, rising between 2004 and 2007. Beef Decoupled but basic price of 2224 €/t and safety net intervention price of 1560 €/t. - same - Sheep Decoupled. - same - Cereals Decoupled but intervention price of 101.31 €/t - same - Set-aside Land claimed for payment as set-aside must be kept in that condition. Organic - same - producers are exempt. Proportion required will decrease as area of unsupported crops will be included in total. Protein Crops Area payment of 55.75 €/ha coupled to production of peas or beans. Subject to - same - maximum area of 1.4 MHa across Europe Permanent Pasture Permanent pasture on 31/12/ 2002 must be maintained as such. Minimum stocking - same - rates likely to apply Unsupported Crops Areas of these crops, excluding permanent crops (i.e. orchards) and woodland, are These crops have no entitlement to payments. eligible for the (increasing) area component of the payments. Increases in the acreage of these crops after 2005 will reduce the eligible area of farms. Energy Crops Coupled payment of 45 €/ha subject to contract with processor. Maximum area of 1.5 MHa across Europe. National Reserve Yes. Consultation on: eligibility, calculation of entitlements, siphon on transfers Yes. Consultation.
55 Costs of Production Feature England Wales National Envelope for Agri- None in England Possible – under consultation. environ. Schemes Modulation to Fund Entry 5% 2005 and 10% 2006 . 1st €5,000 in subsidies are exempt (Defra). Level Stewardship (environ. scheme) Financial Discipline May be implemented if ceilings are breached Trading of Entitlements Entitlements may be traded together with land holdings. During the transition, which Can be transferred with or without land by sale involves historic payments, holder of excess entitlements may transfer to owner- and with land by lease. occupiers who have low entitlements. By 2012 as all agricultural land will have an entitlement there will be little incentive to trade.
56 Costs of Production 1.55 Decoupling is likely to play a major role in the future development of land use, because of the importance of support to the returns from enterprises. Examination of Farm Business data highlights the importance of support as a proportion of total output on many farms. It is clear that once this support is decoupled the economics of production will change dramatically and for many it would seem unviable. However, the actual impacts of reform depend upon a number of factors including:
• The ability of farms (and the industry generally) to reduce costs through restructuring • The impact of changes in production on prices • The impact of the reforms on land prices • The extent that producers see the payment as decoupled and take decoupling as a key point for review and decision-making • The actual level of subsidy paid for the three different land types (moorland SDA, non-moorland SDA and other areas)
1.56 As major reforms of the CAP have only just been implemented there is a large degree of uncertainty surrounding the nature and timing of their impact.
1.57 The decoupling of production from support removes the incentive for production of crops with a negative gross margin in the short term or a negative net margin in the longer term. If crop revenue does not exceed the variable cost expenditure occurred in its production, typically seed fertiliser and crop protection, a negative gross margin will result. A negative net margin would be observed if the crop revenue did not exceed all of the costs of crop production including labour, machinery and land occupancy costs.
1.58 It is envisaged that farmers would not attempt to produce crops that were expected to give a negative gross margin. However, since changes to staffing and machinery ownership can take several years to complete, farmers may tolerate a negative net margin while they carry out structural change to their businesses.
1.59 Agronomic and practical constraints prevent farmers from growing a single but profitable crop. Instead, crop interactions within a rotation give rise to an optimum combination of crops within a farm business. In some cases, farmers will continue to grow crops producing a relatively low gross margin such as peas, beans or linseed. (Peas and beans receive a coupled support payment under the CAP arrangements). However, winter wheat and oilseed rape will remain the combinable crops offering the highest financial return under the reformed CAP arrangements.
1.60 Some farmers may opt to leave land uncropped, however, they will still incur the costs of maintaining land in GAEC. The level of these costs will be an important driver in determining the incentive to crop land.
Costs of Production of Energy Crops 57 1.61 Farmers’ response to major policy change can occur over a period of time rather than immediately. By mid 2005, there was little evidence of substantial change to farming practice, although farmers had increased the area of oilseed rape for the 2005 harvest due to relatively attractive prices at the time of planting . Adaption in response to CAP Reform can be expected to take place over a number of years.
1.62 There are opportunities for farmers to either let land or make land available to contractors. In this way, production is potentially transferred to producers with low production costs.
1.63 Long-term structural change in England has resulted in land being farmed by fewer but larger farmers. Output has continued to rise, in the case of cereal production, but the area of land farmed has changed little. Land ownership has changed less quickly and developments in changes to land holdings have occurred less rapidly than those to business structures.
1.64 As longer term response to CAP Reform, individuals will make their own judgements about:-
• Their willingness or ability to farm • Their willingness to allow others to farm their land • Their willingness to set land aside • Compliance with GAEC conditions.
1.65 A likely long-term response is that the trend towards fewer farm businesses with lower production costs will continue.
1.66 Most land will continue to be farmed but some grassland may be farmed less intensively. Small areas of unproductive land within fields may be removed from production but the overall impact on commodity production will be limited.
Costs of Production of Energy Crops 58 4. RESULTS: POTENTIAL UPTAKE AND IMPACTS ON FARM PROFITABILITY
Introduction
1.1 The previous section has outlined estimates of cost of production for a range of crops that can be used for energy. This section develops the analysis to consider whether production is likely to occur on farm and the possible impacts on the farm business of adoption.
1.2 A major question that is addressed is the extent to which production of crops for energy end use has the potential to alter the level of profitability of farm businesses. This depends on a number of factors including:
- Whether the alternative market for existing crops will lead to higher prices at farm level than would be the case in the absence of this market. - Whether returns from SRC and Miscanthus are such that growing these crops in replacement of available alternatives will improve farm profitability.
1.3 Table 4.1 highlights the generally low levels of profitability for the main farm types in UK agriculture. Given these returns it is understandable why there is considerable interest in alternative uses of existing crops or the production alternative crops
Table 4.1 UK Agriculture: Net Farm Income by Type of Farm Farm 2001/02 2002/03 2003/04 2004/05 Annual % Type Change 2003/4 to 2004/5 Dairy 28,200 14,200 22,100 25,000 13.1%
Grazing 5,800 12,400 14,200 12,000 -15.5% livestock LFA Grazing 1,100 6,700 7,100 5,500 -22.5% livestock Cereals 5,100 11,000 35,500 14,500 -59.2%
General 14,300 11,700 53,500 24,000 -55.1% cropping Specialist 20,200 23,500 31,700 27,000 -14.8% pigs Specialist 22,500 83,500 52,000 80,500 54.8% poultry Mixed 5,300 10,400 22,700 16,000 -29.5%
ALL 13,100 13,900 24,300 17,500 -28.0% Average net farm income per farm (£/farm) Accounting years ending on average in February
Profitability and Model Results 59 Source Defra (2005)
1.4 Whilst Table 4.1 highlights profitability of the overall farm business, it is also useful to examine the relative profitability of available enterprises. The returns (gross margins) for a range of arable crops (prior to the latest CAP reform) can be seen in Table 4.2.
Table 4.2 Comparison of Real Gross Margin per Hectare for Harvest Years 1997 to 2002 (Eastern Region) Crop 1997 1998 1999 2000 2001 2002 Sugar Beet 1012 1005 879 806 825 937 Potatoes 2293 5658 1558 3688 2667 2089 Winter wheat 655 660 717 588 549 520 Winter barley 606 553 614 503 434 454 Spring barley 571 599 521 532 411 491 Oilseed rape 797 609 685 524 447 563 Peas (combined) 638 464 614 485 404 444 Beans 664 508 608 530 403 449 Set-aside 311 305 311 222 208 221 Source: Lang (2004), Report on Farming in the Eastern Counties
1.5 The fundamental reform of the CAP means that for supported crops the returns from production will be significantly reduced. The extent of this change can be approximated by the removal of arable area payments from crop gross margins (Table 4.3).
Table 4.3 Estimated Gross Margins per Hectare Under Reformed CAP Crop Without AAP £ha Sugar Beet* 541 Potatoes 4725 Winter wheat* 301 Winter barley 285 Spring barley 342 Oilseed rape* 305 Peas (combined) 320 Beans 265 Set-aside 240 * Estimated gross margins for these crops (shaded) are budgeted returns presented in Section 4. Hence the estimated returns from sugar beet here are for production for ethanol - not EU sugar.
1.6 Removal of the arable area payment and possible reductions in sugar prices mean that, for the average producer, the full costs of production (including current rental values of land), are greater than the price received for wheat and oilseed rape and approximately equal for sugar (Table 4.4). Though it should be noted that this price for sugar is higher than the current predicted price after EU reforms.
1.7 For sugar the proposed reforms might suggest that end use for energy would become viable as they propose significant cuts in price for human consumption. However, it may be argued that producers might have used the guaranteed higher price for quota production to cover fixed costs of
Profitability and Model Results 60 production and therefore would be able to produce ‘surplus’ sugar relatively cheaply for alternative uses. Therefore reduction of these prices means that this will not occur and actually production will be no more likely after reform.
Table 4.4: Production Costs of Wheat, Sugar Beet and Oilseed Rape Sugar Oilseed Wheat Beet Rape Variable Production costs (costs/ t yield) 32 14 61 Fixed Production costs (£/t) 65 10 143 including Land Charges of (£/t) 18 3 39 Tot. Production Cost (Tot. costs/ t yield) 97 24 204 Current Price 69.5 24.0 145.2 Costs less Price -27.5 0 -58.8 Gross Margin 301 541 305
1.8 The analysis in Table 4.4 might be taken to suggest that production at future likely returns, on average is unlikely to be viable. As mentioned earlier a static comparison of average costs and returns does not reflect the whole story as both the distribution of production costs and the potential for farms to adjust their cost structures as prices change needs to be considered.
1.9 As a first stage work on sugar and wheat undertaken at Cambridge is used to highlight the distribution of production costs around the average figure. It is clear that in both cases low cost producers exist that are able to operate at the lower returns associated with decoupled production. These figures may be simplistically interpreted as a possible supply curve for sugar beet and wheat for energy production, illustrated in Figures 4.1 and 4.2, respectively. That is they highlight, with caveats, the returns necessary to engender production.
1.10 The main conclusion from analysing the distribution of costs is that use of average costs and returns can be misleading in indicating whether production for energy (or for conventional uses) is viable. In addition, the possible changes in fixed costs that might arise through restructuring are important. As figure 4.1 shows for sugar beet a reduction in average fixed costs as a significant impact on the proportion of production that is profitable.
1.11 This leaves the fundamental question as to whether a domestic biofuels market by creating alternative demand will actually improve returns. There are a number of aspects that need to be considered and these are highlighted below.
Profitability and Model Results 61 Figure 4.1: Distribution of Sugar Beet Production Costs
40 35 e n
n 30 o t / £ 25 n o i t
c 20 u d o r 15 P
f o
t 10 s o C 5 0 0 20 40 60 80 100 Area
COP 2002 price 25 % price reduction COP (-20%)
Notes COP are estimated production costs (2002), COP (-20%) is production costs if fixed costs are reduced by 20 per cent; 2002 price is the price in 2002 and 25% price reduction relates to cut from 2002 price
Figure 4.2: Distribution of Costs of Production of Wheat
140 est. mc tonne 120 pri 60 £/tonne (May '05)
) 100 £ (
e n n o t
80 r e p
t s o c
60 l a n i g r a
M 40
20
0 0 20 40 60 80 100 Pe rcentage of Area (%)
1.12 It has been argued that the UK’s surplus production of wheat could be a potential source of supply for biofuel production. However, the reforms of the
Profitability and Model Results 62 CAP may mean that this surplus production will disappear. This is because the previous system involving arable area payments (AAP) acted as an implicit subsidy to production. This meant, for many producers, that even though their costs per tonne of production were higher than the market return, they would still produce in order to receive the AAP which made production profitable overall. With the removal of the AAP this implicit subsidy disappears and producers may cut back production.
1.13 A further factor is that the surplus production generated by this situation is likely to have depressed the UK price of wheat. This arises because any surplus has to be exported and in order to export the price received would effectively have to be at world prices. Because it would not be possible to differentiate between the domestic and export markets the domestic price would also be at the world price (known as export parity). However, if the UK was in a deficit situation, then the price in the UK would reflect the world price plus the cost of transporting grain to the UK. Therefore it would be higher than the prevailing world price (known as import parity). Assuming this is the case, and if under the reforms the UK moves to a deficit position, then prices in the UK may actually increase as a result of the reform.
1.14 A sizeable new market for wheat in terms of biofuels may make it more likely that the UK moves into a deficit situation. Under this scenario it may be argued that this extra demand could contribute to an improved financial return for farmers. The HGCA have recently produced figures which suggests the price impact could be as high as £15 per tonne. Overall this may make production more viable and have a significant impact on farm profitability, but at the same time, the feedstock costs from wheat will rise and make it less competitive for energy production.
1.15 Even if a situation arises (either through regulation or tax breaks for example) that production of biofuels from arable feedstocks becomes viable an important issue is the extent to which any demand created will be met by foreign as opposed to domestic production. A fundamental argument might be that, given the increased liberalisation of agricultural trade (and the potential for further liberalisation under the Doha round), those regions that have comparative advantage in crop production for food may also have the same advantage in the production of similar crops for energy production.
1.16 In the case of sugar, it is clear that the world market is dominated by Brazil. Evidence already cited in this report highlights that bioethanol has been imported from Brazil at prices far below those achievable even assuming the lowest costs of beet production. Of course if demand increased significantly then prices would be likely to rise above this level.
1.17 Increased liberalisation also means that an important factor is the global market for biofuels. If sufficient demand is created globally to divert
Profitability and Model Results 63 considerable proportion of production to this use then there is the potential to raise world prices to the benefit of producers.
1.18 As the EU is already in a deficit position with respect to oilseeds it does make the situation for these crops slightly different. Estimates have been made of increased demand for oilseeds for energy production by 2015 due to the need to meet EU targets and the taxation policies of countries such as Germany. Germany’s policies are effectively driving the demand in the EU, even at the present time 40 per cent of EU oilseed production is crushed for biofuels. Imports may not increase to meet the excess demand, due in part to the unsuitability of palm oil for biodiesel production in particular circumstances (low temperatures) and issues with Genetic Modification with soya. These factors together may lead to significantly increased demand for EU produced oilseed rape. Although EU production may increase in response to this increase demand it may be constrained both by rotational requirements and trade agreements (for example the Blair House agreement effectively limited the area of oilseeds in the EU). Therefore it can be argued that this is the one area where biofuel demand could translate to higher prices for the commodity and improved returns to farmers. However, given that the market is largely driven by manipulation of the tax system, it can be argued that the outcome would not be economically efficient.
1.19 In summary, the recent and proposed CAP reforms are unlikely to increase the viability of using conventional arable crops for energy production. The exception is for sugar beet where large cuts in the supported price for human consumption are proposed. However, the decoupling of support may reduce supply in the UK which may have the alternative effect of reducing the potential supply of feedstocks. The reduction in supply has the potential to lead to higher prices particularly for wheat and may actually benefit those farmers remaining in production. However, this will reduce its relative attractiveness as a feedstock.
1.20 Increased liberalisation in agricultural trade will make it increasingly difficult for domestic producers to compete with imports even if a market for biofuels is created within the UK. Therefore, the potential for UK farmers to benefit from the market may be reduced. Perhaps the major exception to this is for oilseeds where the EU is in deficit and where alternative crops, for a variety of reasons, may not be viable.
1.21 Whilst the reforms may not particularly benefit the biofuels sector it may be argued that by potentially reducing the returns from conventional supported crops they will benefit the establishment of alternative crops for energy. This issue is investigated further in the next section.
Profitability and Model Results 64 Short Rotation Coppice and Miscanthus Production
1.22 The previous section has considered the use of conventional crops for energy and whether production is likely to generate sufficient returns to divert production from other markets. In this section the potential for alternative crops to be adopted and the possible impact on profitability are considered.
1.23 As noted earlier, the key issue under the reformed CAP is whether SRC and Miscanthus can produce returns that are comparable to the possible alternative land uses, including leaving land idle and undertaking the minimum to achieve GAEC.
1.24 Within rotational constraints, a simple budgeting analysis, might suggest SRC and Miscanthus will have to provide gross margins (equivalents) greater than those found for crops in Table 4.2 to be adopted and therefore have an impact on farm profitability. However, this would fail to take into account the complexities of the whole farm business. Therefore, as described in Chapter 2, a suitable generic model for farm-level analysis, developed at the Scottish Agricultural College (SAC) is used to assess the likely uptake of energy crops and the implications for the farm business.
Likely Uptake of Energy Crops
1.25 The first set of results presented relate to the level of uptake of energy crops at various levels of return (Figures 5.3 to 5.6). Results are presented for the reform (R) and non-reform (nR) situations. The figures indicate the gross margin return from energy crops and the per cent of the farm that would be put down to crops (under the assumptions discussed above).
Profitability and Model Results 65 Figure 4.3 Uptake of Energy Crops on Mainly Cereals Farms by Size
Cereals Farms
100 90 80 a e r
a 70 Large nR m r 60 Large R a f
f 50 Small nR o
t 40
n Small R e c
r 30 Medium nR e
P 20 Medium R 10 0 0 100 200 300 400 Energy Crop Gross Margin (£)
Figure 4.4 Uptake of Energy Crops on General Cropping Farms by Size
General Cropping Farms
90 80
a 70 e r a 60 Small nR m r
a 50 Small R f
f Medium nR o
40 t
n Medium R e 30 c
r Large nR e
P 20 Large R 10 0 50 150 250 350 450 Energy Crop Gross margin (£)
Figure 4.5 Uptake of Energy Crops on Mixed Farms by Size
Mixed Farms
90 80
a 70 e r a
60 m Large nR r
a 50 f
Large R f o 40
t Small nR n e 30 Small R c r e 20 Medium nR P 10 Medium R 0 0 100 200 300 400 Profitability and Model Results 66 Energy Crop Gross margin (£) Figure 4.6 Uptake of Energy Crops on Lowland Livestock Farms by Size
Cattle and Sheep (Lowland) Farms
60
50 a e r a 40 Small nR m r
a Small R f
f 30
o Medium nR
t
n Medium R e 20 c
r Large nR e P 10 Large R
0 0 100 200 300 400 Energy Crop Gross margin (£)
1.26 The information in the graphs is quite complex to interpret. Table 4.5 therefore summarises the information by considering the gross margin needed to achieve a 10 per cent uptake on the farm types considered in this analysis both with and without CAP reform.
Table 4.5. Estimated Threshold values of gross margins needed to achieve 10 per cent uptake energy crops No Ref Refor orm m £ha £/ha Small 300 75 Mediu 250 25 Cereals m Large 125 25 Small 300 125 Mediu 225 100 Mixed m Large 225 25 Small 375 100 General Mediu 400 225 Cropping m Large 250 150 Cattle & Sheep Small 100 25
Profitability and Model Results 67 Mediu 100 25 (lowland) m Large 100 25
1.27 The results highlight a number of issues across farm types. First, as expected, the CAP reform has significantly reduced the thresholds necessary to achieve uptake. Second, under both scenarios uptake of energy crops appears to occur at levels of gross margin markedly lower than would be expected given the gross margins of conventional crops shown in Table 4.2. This, in part, may be related to the fact that the energy crop gross margins include the costs of machinery and labour as most work is undertaken through contract.
1.28 As with all LP exercises the model outputs are, to a certain extent, constrained by the underlying assumptions. To clarify the above findings it is necessary to consider these further. The fact that the model is constrained so that farms are engaged in some farming activity means that it is likely that the level of uptake is exaggerated at lower levels of gross margin, because in reality the profit maximising position for farms may actually be to take the SFP and undertake the minimum necessary to ensure GAEC. Although this constraint implicitly assumes that farms will cross subsidise farming enterprise with their SFP. There is evidence that supports this hypothesis (SAC/University of Cambridge 2006).
1.29 The importance of contract work and how it is treated is highlighted by the fact that our results show that the larger farms seem generally to have lower thresholds for uptake. This is surprising given that yields for this group tend to be higher than for the other size groups. In part this may be a result of the underlying assumptions of the model concerning machinery availability. Farms have a choice of machinery and contracting available to them and the extent contractors are used does depend upon the initial allocation of machinery (which is determined prior to the running of the model). Therefore some cereals are grown on the larger farms with the use of contractors which reduces their gross margin accordingly. Consequently, this reduces the level of gross margin necessary before energy crops become viable. In earlier runs of the model, where the contract option was excluded, we found thresholds of £250 and £150 per hectare for the pre and post reform scenarios respectively for the large cereals farms. However it may be argued that due to the greater availability of land it is easier for large farms to adopt energy crops within the farming system and therefore uptake might be achieved at lower levels than for the smaller farms.
1.30 The model does appear to show major changes in cropping with relatively small changes in the level of gross margin generated by energy crops. In part this would seem to be driven by the underlying assumptions in the model. As discussed below the model is not constrained to replicate such factors as
Profitability and Model Results 68 producers’ aversion to risk etc, and therefore once the GM appears higher than the alternatives, large changes in cropping can occur. Though in practice this is unlikely to be the case.
Impact on Farm Profitability
1.31 The previous section has considered possible levels of uptake on our model farms. This section briefly examines the impact on the profitability of the farms of adoption in the post CAP reform situation. Figures 4.7 to 4.10 highlight the impact on Net Farm Income as the gross margin for energy crops rises given the level of adoption highlighted in the previous section.
Figure 4.7 Estimated Impact on Farm Level Profitability : Cereals
Net farm income £ Cereals Farms
100,000 90,000
) 80,000 £ (
e 70,000 m
o 60,000 c
n small I
50,000
m medium r 40,000 a
F large
t 30,000 e
N 20,000 10,000 0 0 100 200 300 400 Gross Margin of Energy Crop
Figure 4.8 Estimated Impact on Farm Level Profitability: Mixed
Net farm income £ Mixed Farms
140,000 120,000 £
e 100,000 m o
c 80,000 n I
m
r 60,000 a F
t
e 40,000 small N medium 20,000 large 0 0 100 200 300 400 500 Energy Crop Gross margin (£)
Figure 4.9 Estimated Impact on Farm Level Profitability: General Cropping
Profitability and Model Results 69 Net farm income £ General Cropping Farms
180,000 160,000
a 140,000 e r a 120,000 m r
a 100,000 f
small f o
80,000
t medium n
e 60,000 large c r e 40,000 P 20,000 0 50 150 250 350 450 550 Energy Crop Gross margin (£)
Figure 4.10 Estimated Impact on Farm Level Profitability: Livestock
Net farm income £ Cattle and Sheep (Lowland) Farms
60,000
50,000 a e r a 40,000 m r a f
Small
f 30,000 o
t Medium n
e 20,000 Large c r e
P 10,000 1.32 Below0 gross margins of £150 per hectare for energy crops the impact on farm level50 profitability150 is generally250 relatively350 450 small. The550 exceptions are with the largest size groupsEnergy in theCrop livestockGross margin and (£) mixed categories. This is due to the high level of uptake at low levels predicted in the models. Given the relative riskiness of energy crop production due to the long production cycle and uncertainty about markets, risk averse farmers are unlikely to adopt at such high levels of uptake as the model predicts. This would mean that the likely impacts on NFI will be much smaller. This is likely to be a general issue for all farm types considered. For general cropping, the impact of energy crops on farm incomes is negligible until gross margins reach £250 per hectare.
1.33 Given that a margin of £150 per hectare appears to be a threshold beyond which the impacts on a number of the farms modelled becomes greater, it is useful to assess the changes necessary for energy crops to achieve this level of return (Tables 4.6 and 4.7).
Table 4.6 Comparison of standard assumptions SRC and GM £150 Standard GM £150 Difference assumption levels Price £/odt 35 42 7
Profitability and Model Results 70 Yield t/ odt/ha/yr 9 12 3 Energy Crop Payment £/ha 30 88 58 Establishment Grant £/ha 1000 1572 572 Based on assumption of 6 per cent discount rate
Table 4.7 Comparison of standard assumptions Miscanthus and GM £150 Standard GM £150 Difference assumption Price £/odt 25 31 6 Yield t/ odt/ha/yr 14 19 5 Energy Crop Payment £/ha 30 112 82 Establishment Grant £/ha 920 1721 801 Based on assumption of 6 per cent discount rate
1.34 The farm level model appears to indicate that under the quite restrictive assumptions concerning continuation of production, the estimated gross margins from SRC and Miscanthus may be sufficient to lead to adoption. However, on the assumption that farmers are unlikely to convert large swathes of their land to energy crops because of the inherent uncertainties and that higher gross margins are necessary to have a major impact then the overall impact on the profitability of farms would be limited.
1.35 The model works on the basis of gross margins as it assumes a level of fixed costs associated with farms. However, as discussed earlier, assuming simple profit maximisation, energy crops need to generate positive net margins in the longer run to justify adoption. In order to generate sufficient margin to cover fixed costs and produce a positive net margin our estimates suggest that energy crops would have to produce a gross margin of over £250 per hectare.
1.36 On the topic of net margins our figures for conventional crops (highlighted in Figures 4.1 and 4.2 above) suggest that at prices of £24 per tonne for sugar beet and £70 for winter wheat around 50 and 60 per cent of production will be able to generate a positive net margin, respectively.
Further Issues
Risk and uncertainty
1.37 The analysis above has touched upon the issue of risk relating the area of land that farmers will allocate to energy crops. There are other areas of risk involved in the production of these crops. Energy producers will want to ensure continuity of supply and therefore production is only likely to occur on a contract basis. Farms may be attracted to contracts if they offer security of price for the product and in fact may supply to energy end-users at below average market price if the return is more secure given the inherent instability in agricultural markets.
Profitability and Model Results 71 1.38 Substitution and uptake has been assessed on the basis of energy crops producing the same returns as conventional crops. However, given the long production cycles for SRC and Miscanthus coupled with the fact that experience of growing these crops is limited, then all else being equal it is likely that a greater return is needed than alternatives to encourage production. The extent of the gap will reflect how risk averse producers are.
1.39 Policy uncertainty also exists in particular over the future of set-aside and the level of the energy crops payment (given its EU wide limit).
Cost Structures
1.40 Proponents of energy crop production have argued that farm level fixed costs can be reduced thus improving their viability against conventional cropping. Though not, of course, against the option of not cropping at all. It is difficult to assess the extent that a business for example that still maintains arable or livestock production is able to reduce fixed costs by apportioning part of their land to SRC or Miscanthus. The very nature of fixed costs might suggest that the savings would not be great. This is particularly the case with labour, given the large scale reductions in full time employment that have already occurred.
1.41 A key finding is that the cost structures in place at the current time mean that producers who only achieve average performance will struggle to produce arable crops at prevailing market prices. This suggests that even if returns from the energy market for these products were the same as other markets the average producer may be better off leaving their land uncropped. The extent that this occurs will depend upon a number of factors including the behavioural motivations of farmers and whether they will chose to use the SFP and other income from diversified sources to subsidise their farming activities.
Profitability and Model Results 72 5. CARBON AND ENERGY BALANCES
6.1 In this Chapter carbon and energy balances are presented for the energy chains considered in this study. Estimates of the relative costs, energy use and GHG (greenhouse gas) emissions are based on the work of the Centre for Energy Policy and Technology at Imperial College, London (ICCEPT) using available estimates from previous studies, as highlighted in Chapter 2. The feedstock costs used are those that have been calculated as part of this study.
6.2 Tables 5.1 and 5.2 present summaries of the ranges of fossil energy inputs, greenhouse gas emissions, and costs of heat electricity and transport fuels from energy crops. These results are also summarised in Figures 5.1 to 5.4 (below). The results are presented in ranges because there are a variety of technologies available to convert crops into energy, as well as various possibilities in terms of sale of by-products. In addition the ranges allow us to compare the impact of our higher and lower estimates of feedstock costs. The low end of the range indicates the most favourable scenario (lowest energy requirement, lowest emissions resulting from production of energy and lowest cost) whilst the high range indicates the least favourable results. The exact assumptions underlying the estimates are shown in the footnote to the tables in Appendix I. The tables in Appendix I also highlight the sources of information used for the calculations.
Table 5.1 Summary ranges for biomass fuel chain fossil energy inputs, greenhouse gas emissions and costs
Cost (p/kWe for Fossil Energy electricity or CHP GHG Emissions Biomass Combustion Supply Requirement chains or p/kWth (kgCO2eq./GJ) Chain (GJf/GJ output) for heat-only chains) Low High Low High Low High Electricity from Wheat Straw 0.57 0.65 65.00 67.00 5.98 5.98 Electricity from Miscanthus 0.25 0.29 25.00 27.00 6.02 6.65 Electricity from Willow SRC 0.36 0.40 22.37 26.37 5.38 7.67 Heat from Wheat Straw 0.28 0.31 23.62 25.62 1.42 1.62 Heat from Miscanthus 0.17 0.19 8.64 10.64 1.40 1.84 Heat from Willow SRC 0.10 0.14 6.01 10.01 1.67 2.20 CHP from Wheat Straw 0.29 0.30 23.62 25.62 4.74 5.71 CHP from Miscanthus 0.18 0.19 8.64 10.64 4.57 6.30 CHP from Willow SRC 0.24 0.28 15.20 19.20 3.82 8.26 Energy and GHG values from Elsayed, et. al.; Carbon and Energy Balances for a Range of Biofuel Options, DTI 2003; costs calculated from ICCEPT figures, using Cambridge data for feedstock costs
Liquid Biofuel Supply Chains
Ethanol from Wheat
6.3 Wheat can be converted into ethanol at a cost of around 46 pence per gasoline equivalent litre, even when the wheat feedstock is costed at the full current
Carbon and Energy Balances 73 production cost of £96.8/t. By contrast Brazilian ethanol is understood to arrive in the UK at a cost of something like 26 pence per litre (CIF), including a 10 ppl tariff. The 20 ppl rebate means the fuel costs about 6 ppl. As a comparison, current petrol and diesel prices at the pump, without taxes, are 26 ppl at the pump and 30 ppl respectively1. It is likely that feedstock costs would be substantially lower if current wheat prices, of around £65/t, are maintained. We estimate that if fixed costs (principally machinery, labour and land) were reduced by 35% the cost of production of wheat would fall to around £74/t, giving an ethanol price of 36 pence per gasoline equivalent litre. The restructuring of farms that is likely to occur as a result of decoupling (discussed in Chapters 3 and 4) underlies the assumption that average fixed costs will fall.
Table 5.2 Summary ranges for liquid biofuel chain fossil energy inputs, greenhouse gas emissions and costs
Fossil Energy GHG Emissions Cost (£/gasoline- Requirement Liquid Biofuel Supply (kgCO2eq./GJ) equivalent litre) Chain (GJf/GJ output) Low High Low High Low High Ethanol from Wheat 0.27 0.90 51.48 79.45 0.36 0.57 Ethanol from Sugar Beet 0.30 0.92 28.00 51.00 0.41 0.55 Ethanol from Wheat Straw¹ 0.13 0.28 5.30 13.00 0.29 0.44 Biodiesel from Rapeseed 0.39 0.44 49.00 54.00 0.38 0.87 Rapeseed oil from oilseed 0.29 ± .02 31 ± 2 - rape² ¹ Projected for commercial plants ² Rapeseed oil data based on Elsayed et al (2003). Rest compiled by Imperial College. Data for ethanol from wheat based on Rickeard, et. al., WTW Evaluation for Production of Ethanol from Wheat; Low Carbon Vehicles Partnership Fuels Working Group, Well-to-wheels Sub-Group, September 2004; Energy and GHG data for bioethanol from sugar beet and biodiesel from rapeseed from Concawe Report Well-to Wheels Analysis of Future Automotive Fuels and Powertrains in the European Context, 2003; Energy and GHG data for ethanol from wheat straw from Woods and Bauen, Technology Status Review and Carbon Abatement Potential of Renewable Transport Fuels in the UK, DTI 2003
Table 5.3 Fossil Energy Requirements and Greenhouse Gas Emissions for Reference Fuel Chains Fossil Energy GHG Emissions Fuel Requirement (kg CO2eq/GJ) GJf/ GJ Gasoline 1.14 85.8
Ethanol from Sugar Beet 0.61 40
Diesel 1.16 87.4
Rapeseed Oil 0.29 31
NG (EU-mix) 1.06 61
Electricity (UK-mix) 3.08* 160 *includes non-fossil primary energy
1 http://www.theaa.com/allaboutcars/fuel/
Carbon and Energy Balances 74 6.4 Greenhouse gas emissions per unit of fuel energy are however relatively high for ethanol produced from wheat, at between 51 and 79 kgCO2eq./GJ, particularly when compared to ethanol from sugar beet.
Ethanol from Sugar Beet
6.5 Ethanol from sugar beet is likely to cost around 10% more than ethanol from wheat (even if fixed costs are reduced by 35%). However the feedstock costs might be somewhat lower than those for wheat ethanol (Table 3.15). At these prices it is not likely to be an economic product, but it should be noted that there is relatively large-scale production of beet ethanol in France, used as ethyl tertiary-butyl ether (ETBE) an oxygenating agent for petrol.
Ethanol from Wheat Straw
6.6 Wheat straw might be used to produce ethanol at costs ranging from 29 to 44 pence per gasoline equivalent litre. Such production would be particularly efficient in terms of energy and GHG’s produced. However, whilst noting that it could be economic, the technology as yet needs to be proven commercially. This said, there are plans for a full scale commercial facility in North America.
Biodiesel from Oilseed Rape
6.7 Biodiesel from oilseed rape could cost between 38 and 87 pence per diesel equivalent litre, (respectively assuming: feedstock prices of £153.8/t and high yield of 0.405 t RME/t seed with maximal sale of co-products: Or, £203.8/t and low yield of 0.312 t RME/t seed without sale of co-products).. The lower price assumes that the production costs for oilseed rape could be reduced to £153.8/t through a 35% reduction in fixed costs on current levels.
6.8 Greenhouse gas (GHG) emissions per GJ are relatively high when compared to ethanol from wheat straw. These GHG emissions represent a cost in excess of around £200 per tonne Carbon emission abated, if it is assumed that emissions are actually at the low end of the range presented and that the biofuel price is also at the low end of the range (Table 6.4).
Biomass Combustion Supply Chains
Electricity from Biomass
1.42 Electricity produced from biomass ranges in cost from around 5.4 to 7.7 pence per kWh (electric). This compares to a wholesale price for baseload electricity of around 2 per per kWh from in the UK (ILEX, 2004). Such production could be economic, if one assumes that the values of ROC’s from biomass fuelled generation is around 5 p/kWh, and that this is a justifiable sustainable
Carbon and Energy Balances 75 figure in the context of continuing coal-fired generation.1 It is most likely that these figures explain the current efforts of coal fired generators to procure ROC’s. (These efforts are extensive, currently ongoing and have generated considerable comment). Some imports of coconut and olive pip wastes are occurring for ROC co-firing. Although these represent a considerable subsidy the industry is in its early development and the tonnages used to date have been relatively small - and some use we observed has resulted in great inefficiencies (eg 280 mile round trips and energy intensive processing).
Heat from Biomass
1.43 Heat produced from biomass ranges in cost from around 1.4 to 2.2 pence per kWh (thermal). Such production is likely to be economic, if one compares it to the current domestic cost of natural gas at around 2 pence per kWh. There is however a lack of established supply chains for biomass fuels. Hence gas is likely to remain more convenient and cheaper, without changes which would result in an integrated supply chains (eg boiler suppliers linked to biomass producers, resellers and sources of demand (schools, hospitals, district heating, etc)). The production of heat from Miscanthus and SRC is particularly efficient in terms of net energy produced and GHG emissions.
1.44 The relative efficiency of the biomass crops used for heat is largely due to their high yields, the fact that all biomass produced is used, and because only minor industrial transformations are required.
Combined Heat and Power (CHP) from Biomass
6.9 Electricity produced from CHP plants fuelled with biomass ranges in cost from around 3.8 to 8.3 pence per kWh (electricity). Such production could be economic, if one assumes that the values of ROC’s from biomass fuelled generation is around 5 p/kWh. However this technology requires purpose built plants with sources of demand for the heat. Such investments are unlikely in the absence of integrated chains of demand and / or support.
1 The exact value of a ROC is difficult to determine because it is in part determined by the extent that firms fail to meet their renewable obligations. This also makes future values difficult to predict. However, Platts suggest a price of between 4 and 6 p/kWh depending on future expansion of wind energy, which would make our estimate of 5 p/kWh seem reasonable. See http://www.prnewswire.co.uk/cgi/news/release?id=150667.
Carbon and Energy Balances 76 Figures 5.1: Summary graph of Fossil Energy Requirements for Biomass and Liquid Biofuel Chains Fossil Energy Requirements per Unit of Energy Output
CHP from Willow SRC
CHP from Miscanthus Low High CHP from Wheat Straw
Heat from Willow SRC
Heat from Miscanthus
Heat from Wheat Straw
Electricity from Willow SRC
Electricity from Miscanthus
Electricity from Wheat Straw
Biodiesel from Rapeseed
Ethanol from Wheat Straw
Ethanol from Sugar Beet
Ethanol from Wheat
Rapeseed oil from oilseed rape
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Fossil Energy Requirement (GJ fuel/ GJ output)
77 Carbon and Energy Balances Figures 5.2: Summary graph of Greenhouse Gas Emissions for Biomass and Liquid Biofuel Chains Greenhouse Gas Emissions per Unit of Energy Output
CHP from Willow SRC
CHP from Miscanthus Low High CHP from Wheat Straw
Heat from Willow SRC
Heat from Miscanthus
Heat from Wheat Straw
Electricity from Willow SRC
Electricity from Miscanthus
Electricity from Wheat Straw
Biodiesel from Rapeseed
Ethanol from Wheat Straw
Ethanol from Sugar Beet
Ethanol from Wheat
Rapeseed oil from oilseed rape
0 10 20 30 40 50 60 70 80 90 kgCO2eq./GJ
78 Carbon and Energy Balances Figures 5.3: Summary graph of Costs of Biomass Heat and Electricity
Production Costs for Heat and Electricity Production from Combustion of Biomass Low High
CHP from Willow SRC
CHP from Miscanthus
CHP from Wheat Straw Cost of Electricity, p/kWe
Electricity from Willow SRC
Electricity from Miscanthus
Electricity from Wheat Straw
Heat from Willow SRC
Heat from Miscanthus Cost of Heat p/kWth
Heat from Wheat Straw
0 1 2 3 4 5 6 7 8 9
p/kWth for heat-only plants or p/kWhe for electricity or CHP plants
79 Carbon and Energy Balances Figures 5.4: Summary graph of Costs of Liquid Biofuels
Production Costs for Liquid Biofuels Low High
Biodiesel from Rapeseed
Ethanol from Wheat Straw
Ethanol from Sugar Beet
Ethanol from Wheat
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00
£/gasoline/diesel-equivalent litre f
80 Carbon and Energy Balances Cost of Carbon Abatement
6.10 As mentioned in Chapter 1 there is a presumption of the social cost of carbon been set at £70 per tonne. It is therefore useful to place our findings on costs and emissions in this context. Table 5.4 presents estimates of the costs of carbon abatement for the fuel chains that the analysis above suggests are the most viable. A key assumption in this analysis is that the prices paid to farmers reflects their full costs of production excluding any possible subsidies that may be associated with energy crop production.
6.11 The general method adopted is to consider the differences in costs of production for the renewable source of energy (as estimated in this study) and the fossil fuel equivalent (the reference level in table). Then available information on differences between the level of emissions from the renewable source and the fossil fuel equivalent (reference level in table) are compared. These figures are calculated in terms of CO2 equivalent initially and then converted to tonnes of carbon. Dividing the equivalent amount of carbon saved by the difference in costs between the renewable source and the fossil fuel equivalent gives us the cost of carbon abatement.
6.12 This can be illustrated using the production of ethanol from winter wheat as an example. Using our lower estimates of costs of production for bioethanol from wheat, the difference in cost when compared to fossil fuel is 10 ppl (36 compared to 26 ppl). With wheat yielding a fossil fuel equivalent of 1884 litres per hectare there is an equivalent difference in cost of £188 per hectare (1884 litres at 10 ppl). In terms of carbon emissions, using our low estimates and placing our analysis on a per hectare basis, estimated emissions are 3116 kg/CO2 equivalent per hectare. This can be compared to 5193 kg/CO2 equivalent per hectare for fossil fuel, producing a saving of 2077 kg/CO2 equivalent per hectare or 2.08 tonnes. Therefore our biofuel is estimated to save 2.08 tonnes kg/CO2 equivalent per hectare at a cost of £188 (£91 per tonne). The final stage is to convert CO2 equivalent into tonnes of Carbon equivalent. 2.08 tonnes of kg/CO2 equivalent is equal to 0.57 tonnes of carbon equivalent. Therefore dividing £188 by 0.57 gives us the estimated cost of a tonne of carbon emission abated (£330 per tonne).
6.13 Similar calculations for sugar beet and oilseed rape give us estimates of £374 and £206, respectively. The cost of carbon abatement of bio-diesel is approximately two-thirds that of wheat ethanol, owing to the higher energy content of bio-diesel.
6.14 These figures for all three are clearly higher than the estimated social cost of carbon of £70 per tonne. In addition, it should be reiterated that these estimates are based on low cost and low emissions assumptions concerning biofuel production.
Carbon and Energy Balances 81 6.15 A different picture emerges if we consider the use of Miscanthus and SRC for heating. Not only do they have lower emissions but at the lower end of our cost estimates they are actually cheaper sources of energy. This means that there are cost savings from Miscanthus or SRC fired boilers which would result in a saving of up to £117 per tonne of Carbon emission abated for Miscanthus or £61 for SRC chips.
Carbon and Energy Balances 82 Table 5.4. Costs and Balances of Carbon and Energy: for the most economic fuel chains. Winter Sugar Miscanthu Willow Crop Wheat Beet OSR s SRC
Products wood ethanol ethanol RME straw chips Road Road Road End-use Fuel Fuel Fuel Heating Heating COP (£/tonne) 96.8 24.0 203.8 46 66 Yield, tonnes 7.9 52.9 3.6 13.2 9.0 Net Revenues from Straw (£/ha) Total Cost of Production (£/ha) 767.7 1269.6 737.8 613.6 592.9
Units litres litres litres odt odt Est. BioFuel Yield (units/t produce) Source: Woods and Bauen 360 112 377 1 1 (units/ha) 2855 5925 1365 13.2 9.0 (mt fuel/ha) 2.3 4.7 1.2 13.2 9.0 Yield (Fossil Fuel eq litres/ha) (A) 1884 3910 1201
Feedstock cost £/t Fuel 339 270 614 46 66 Feedstock cost pence/unit Fuel 27 21 54 Feedstock cost £/GJ (ex-farm) 12.7 10.1 16.6 2.7 3.9
Biofuel cost (pence per fossil- equivalent litre: Tables 6.1 & 6.2 - p/kWh low biofuel prices) 36 41 38 (th) 1.40 1.67 Reference domestic fuel costs p/kWh (pence per litre) 26 26 30 (th) 2.00 2.00 Difference (pence per litre) 10 GJ fuel energy (all per ha – thermal energy content) 60.5 125.6 44.6 224.4 153.0
GHG Emissions (kgCO2eq/ha) 3116 5024 2183 1939 920 GHG Emissions (kgCO2eq /(litre fuel eq, or odt)) 1.7 1.3 1.8 147 102
Reference GHG Emissions (kgCO2eq/ha) 5193 10777 3894 13688 9333 Reference GHG Emissions (kgCO2eq /(litre fuel eq, or odt)) 2.8 2.8 3.2 1037 1037
Emissions abatement cost (£/ha) 188 587 96 -374 -140
Carbon dioxide emissions abated (t CO2eq/ha) 2.08 5.75 1.71 11.75 8.41 Carbon dioxide emissions abatement cost (£/t CO2) 91 102 56 -32 -17
Carbon emissions abated (t Ceq/ha) 0.57 1.57 0.47 3.21 2.30 Carbon emissions abatement cost (£/t C) 332 374 206 -117 -61
Carbon and Energy Balances 83 6. CONCLUSIONS AND FUTURE RESEARCH
Farm level economics of energy crop production
1.1 As this report relates to the period immediately after the introduction of CAP reform, the discussion on the economics of energy crop production considers both the current relative production costs and the likely longer-term response of farmers to energy crop production. For traditional crops, new energy markets are also considered. Finally, the opportunities for and threats to SRC and Miscanthus production are considered.
1.2 It was established in Section 4 that there is a range of performance of crop production costs between producers but that much wheat production would be produced at a negative net margin from 2005.
1.3 Efficient producers would be expected to grow wheat and oilseed rape profitably and would sell to energy end users if this provided the most favourable return. It is possible that other producers would remain in production due to cross subsidisation from other sources of income (most likely the Single Farm Payment).
1.4 Modern wheat and oilseed rape production practices have evolved over many years and the scope for significant future reductions in production costs are limited. Biomass technology is still in a stage of development prior to full commercial exploitation. It is therefore likely that there will be future opportunities for production of biomass crops at lower cost.
Farmer response to CAP Reform
1.5 Our preliminary analysis would point to the following conclusions:
- Given the current costs and likely returns from energy end uses the impact on farm profitability is likely to be negligible. - For sugar beet, future developments do not suggest that development of markets will significantly alter the profitability of these enterprises and therefore will not significantly alter farm profitability - For wheat and oilseeds, under certain assumptions about the future development of markets, the increased demand for biofuels could lead to higher prices and hence positive impact on profitability of farms.
1.6 Even though the CAP reform improves the competitiveness of SRC and Miscanthus against conventional crops, given current technology the estimated returns are not sufficient to encourage widescale adoption. The analysis suggests that in a reformed CAP, given that non-production is an option, either costs of production would have to be cut or prices raised before it becomes viable to incorporate in farm rotations.
Conclusions and Future Research 84 1.7 Under restrictive assumptions our modelling exercise suggests that SRC and Miscanthus currently could generate sufficient returns to make adoption viable. However, the extent of uptake is determined by a more complex decision making process of farms and therefore it is felt that the extent of uptake and the impact on farm incomes are likely to be limited.
Farmer risks and incentives of energy crop production
1.8 When conventional arable crops are grown for energy, the variety grown and agronomic practice is no different to production of crops for existing feed or industrial markets. There are no disincentives in relation to uptake of untried or unfamiliar technology. Also, the conventional arable crops are annual crops so there are no long-term consequences to their production. For these reasons, the threshold for entry to annual (traditional) crops for energy production is very low.
1.9 In the case of wheat, where identical varieties can be grown for energy and other uses, there is little risk to production since alternative markets are available for the crop produced.
1.10 End users may wish to contract production in order to ensure continuity of supply. The farmer would need to assess the benefits of security of outlet with the reduced business flexibility.
1.11 The financial return from SRC and Miscanthus production is sensitive (as for all crops) to yield and input costs, however small changes in land occupancy and finance costs are very important to the financial return. The costs of land occupancy will vary according to farmers’ personal circumstances and to the alternative potential uses of land. In the context of GAEC, negative rents may be chargeable on some farms (thus one might be paid to manage to GAEC some lands without alternative uses). Land unsuited to arable production and too wet or inaccessible for livestock production may be attractive for SRC and Miscanthus production.
1.12 It is estimated that in order for energy crops production to break-even at the farm level when fully costed (and therefore be viable in the long run), yields (prices) would need to rise by 78 (60) and 88 (60) per cent for Miscanthus and SRC, respectively. In terms of the energy crop payment (subsidy) it is estimated that this would have to rise to £218 and £193 per hectare per year for Miscanthus and SRC respectively from the current level of approximately £30.
1.13 SRC and Miscanthus production requires a longer-term commitment. Farmers growing these crops face risks from unknown future yield prospects and from unforeseen pest or disease problems. Despite contractual guarantees, farmers
Conclusions and Future Research 85 are also dependent on the long-term financial viability of their end user. The risks of commitment to energy crop production are very real.
1.14 Many farmers are familiar with an annual production cycle. Longer-term investment decisions, such as construction of new grain stores or livestock units, are made infrequently. In agriculture in England, only horticultural producers such as top fruit growers are familiar with such a long production cycle. Succession and family priorities cloud investment decisions of this type. When comparing alternative cropping options, a longer-term commitment would usually need to be justified by higher financial return.
1.15 The situation prevailing in 2005 is that many of the early adopters of SRC and Miscanthus production experienced difficulties because their crops were committed to a single end user. When the end user ceased trading, there was no alternative market for the crop produced. The experiences of the early adopters render the market unattractive to new producers.
1.16 Straw, an existing co-product, can be substituted for energy crops in heating or power plants, because it can be readily combusted for heat or power generation. The value of straw is thus likely to set a long-term maximum price for SRC and Miscanthus in areas close to those producing straw. However, with the sole exception of the NFFO funded straw burning station at Ely, there are no straw burning power plants in the UK. The power station at Ely uses around 200,000 tonnes of straw per year. ROCs have thus not stimulated construction of further straw power plants because the use of straw as animal bedding, for industrial uses or carrot cover, or simply incorporated into the soil for convenience or the benefit of the next crop, is currently more profitable than using it in power plants. Harvestable straw production amounts to around 14 Mt per annum (total cereal production of 22 Mt, with grain yields of 6.9 t/ha and harvestable straw yields conservatively estimated at 4.5 t/ha (Defra: Agric. in the UK/ Newman: DTI)). This tonnage has a net calorific content of around 200 Peta Joules or equivalent to around 10% of total supplied domestic energy (DTI1). There will be a price of energy at which straw could become an attractive fuel, with potential to supply considerable volumes.
The Energy Crops Scheme
1.17 SRC and, even more so, Miscanthus are not profitable in the absence of energy crop subsidies, even if fixed costs are ignored. Given that power stations are unlikely to commit to contracts beyond 2016, because ROCs allowances for co-firing of biomass with coal are scheduled to cease at this time, it would appear that the scope for large scale plantings of biomass crops are limited. Planting grants under the Energy Crops Scheme go some way to making the crops more economic however, given the industry failures to date and the long term nature of these crops, growers are unlikely to plant in the
1 http://www.dti.gov.uk/energy/inform/energy_indicators/
Conclusions and Future Research 86 absence of long term contracts with end users. In turn, the end users are unlikely to commit to long term contracts in the absence of long term commitments from government, which seem uncertain given the current debate about the value of these measures.
1.18 Almost no plantings of SRC and Miscanthus would occur in the absence of the Energy Crops Scheme, because the gross margins in the absence of subsidies are so unfavourable. However, maintaining the Energy Crops Scheme by itself, is not likely to stimulate an extensive industry without other schemes to make the products more economic.
Energy crop supply chain development
1.19 A biomass industry to fuel domestic heating seems unlikely to develop, in the absence of changes to government policy and incentives, as supplies of gas are relatively abundant and more convenient for domestic boilers.
1.20 In areas which are not connected to gas mains, biomass crops could compete effectively to fuel small scale heating plants (or CHP), close to sources of SRC or Miscanthus.
1.21 Ethanol from wheat is not likely to become cheaper with the decoupling of farm support from the CAP. It would appear likely that there will be adjustments to the fixed cost structure of these crops over the long term and this would lead to a better match between the full costs of production and market prices.
1.22 The volumes of wheat projected to be used to produce sufficient ethanol for 5.75% admixing with petrol (3-4 Mt) are alone unlikely to result in large changes in the wheat price because this volume is only a small fraction of world wheat trade (about 100-120 Mt).
Liquid Fuels
1.23 Wheat might be used to produce ethanol at a competitive price with fossil gasoline even if wheat prices were to increase by around 35 per cent from current levels (although it would not currently be competitive with imports) - assuming the current 20 pence per litre derogation in tax for biofuels is maintained and that current petrol prices are maintained. Biodiesel could likewise be economic compared to fossil diesel (with the 20 pence per litre derogation) if the price were to be maintained at around the current price of £130/t (ex-farm). It is likely however that production would fall if these prices are maintained, although a price of £154/t might maintain production in the long run (with 35% reductions in fixed costs).
Conclusions and Future Research 87 1.24 Ethanol from wheat straw is not a realistic option in the short term, because the technology remains to be proven.
1.25 The costs of abatement of Carbon emissions for both wheat ethanol and bio- diesel greatly exceed the governments recommended cost of carbon abatement (£330 and £200 respectively, compared to £70 per tonne C abatement (DfT, 2004)). However, if reductions in carbon emissions and security of supply are required for road transport, biodiesel or bioethanol are the only realistic options. Costs around the lower end of this range are being incurred for offshore wind power.
Biomass Combustion Supply Chains
Electricity from Biomass
1.26 Electricity produced from biomass ranges in cost from around 5.4 to 7.7 pence per kWh (electric). This compares to a wholesale price for baseload electricity of around 2 per per kWh from in the UK (ILEX, 2004). Such production could be economic, if one assumes that the values of ROC’s from biomass fuelled generation is around 5 p/kWh, and that this is a justifiable sustainable figure in the context of continuing coal-fired generation. It is most likely that these figures explain the current efforts of coal fired generators to procure ROC’s. (These efforts are extensive, currently ongoing and have generated considerable comment). Some imports of coconut and olive pip wastes are occurring for ROC co-firing. Although these represent a considerable subsidy the industry is in its early development and the tonnages used to date have been relatively small - and some use we observed has resulted in great inefficiencies (eg 280 mile round trips and energy intensive processing).
Heat from Biomass
1.27 Heat produced from biomass ranges in cost from around 1.4 to 2.2 pence per kWh (thermal). Such production is likely to be economic, if one compares it to the current domestic cost of natural gas at around 2 pence per kWh. There is however a lack of established supply chains for biomass fuels. Hence gas is likely to remain more convenient and cheaper, without changes which would result in an integrated supply chains (eg boiler suppliers linked to biomass producers, resellers and sources of demand (schools, hospitals, district heating, etc)).
1.28 The production of heat from Miscanthus and SRC is particularly efficient in terms of net energy produced and GHG emissions (Table 6.4). There is thus a niche for heating applications where gas supplies are not available. Another economically and environmentally efficient niche exists where the desire for a ‘green’ heating solution outweighs the inconvenience of fuel deliveries and handling (when compared to mains gas).
Conclusions and Future Research 88 1.29 The relative efficiency of the biomass crops used for heat is largely due to their high yields, the fact that all biomass produced is used, and owing to lower conversion costs and higher efficiencies (only minor industrial transformations are required).
Combined Heat and Power (CHP) from Biomass
1.30 Electricity produced from CHP plants fuelled with biomass ranges in cost from around 3.8 to 8.3 pence per kWh (electricity). Such production could be economic, if one assumes that the values of ROC’s from biomass fuelled generation is around 5 p/kWh. However this technology requires purpose built plants with sources of demand for the heat. Such investments are unlikely in the absence of integrated chains of demand and / or support.
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References 92 Appendix I - Breakdown of Fuel Chain Costs 93 7. APPENDIX I. SUMMARY BREAKDOWN OF FUEL CHAIN COSTS
Production Costs for Ethanol from Wheat
Low High Feedstock Costs £/t EtOH 254 333 £/GJ EtOH 9.53 12.46 £/l EtOH 0.202 0.264 £/gasoline-eq. litre EtOH 0.313 0.409 Feedstock Transport Costs £/t EtOH 9.08 9.08 £/GJ EtOH 0.34 0.34 £/l EtOH 0.007 0.007 £/gasoline-eq. litre EtOH 0.011 0.011 Total Production Costs, £/t EtOH 178 118 Total revenues from co-products, £/t EtOH -160 0 Net Costs of Conversion £/t EtOH 18 118 £/GJ EtOH 0.67 4.41 £/l EtOH 0.014 0.093 £/gasoline-eq. litre EtOH 0.022 0.145 Ethanol Distribution £/t EtOH 10.32 10.32 £/GJ EtOH 0.61 0.61 £/l EtOH 0.013 0.013 £/gasoline-eq. litre EtOH 0.009 0.009 Net Fuel Chain Costs £/t EtOH 292 470 £/GJ EtOH 10.93 17.60 £/l EtOH 0.232 0.373 £/gasoline-eq. litre EtOH 0.359 0.578 Lower feedstock production costs are based on £74/t wheat (fixed costs down by 35%); higher feedstock costs are based on £96.8/tonne wheat (standard assumptions). Lower net cost ethanol conversion uses gas-fired combined heat and power supply, which generates surplus electricity. Revenues are also generated from sales of DDGS animal feed. Higher net cost conversion uses gas-fired boiler and electricity from the grid, with no co-product revenues.
Appendix I - Breakdown of Fuel Chain Costs 94 Production Costs for Ethanol from Sugar Beet Low High Feedstock Production and Transport Costs £/t EtOH 263 307 £/GJ EtOH 9.84 11.51 £/l EtOH 0.209 0.245 £/gasoline-eq. litre EtOH 0.324 0.379 Total Production Costs, £/t EtOH 130 130 Total revenues from co-products, £/t EtOH -69 0 Net Costs of Conversion £/t EtOH 61 130 £/GJ EtOH 2.30 4.87 £/l EtOH 0.049 0.104 £/gasoline-eq. litre EtOH 0.076 0.160 Ethanol Distribution £/t EtOH 10.32 10.32 £/GJ EtOH 0.61 0.61 £/l EtOH 0.013 0.013 £/gasoline-eq. litre EtOH 0.009 0.009 Net Fuel Chain Costs £/t EtOH 334 448 £/GJ EtOH 12.53 16.76 £/l EtOH 0.267 0.357 £/gasoline-eq. litre EtOH 0.413 0.552 Higher cost ethanol production chain uses feedstock costs of £23.5/t clean sugar beet (standard assumptions). Lower cost chain is based on £20.1/tonne clean sugar beet (fixed costs down by 35%), and includes revenues from sales of pulp pellet feed of £2.57/GJ ethanol
Appendix I - Breakdown of Fuel Chain Costs 95 Production Costs for Ethanol from Wheat Straw Low High Feedstock Costs £/t EtOH 94 99 £/GJ EtOH 3.52 3.72 £/l EtOH 0.075 0.079 £/gasoline-eq. litre EtOH 0.116 0.122 Feedstock Transport Costs £/t EtOH 5.87 5.87 £/GJ EtOH 0.22 0.22 £/l EtOH 0.005 0.005 £/gasoline-eq. litre EtOH 0.007 0.007 Total Production Costs, £/t EtOH 133 244 Total revenues from electricity sales, £/t EtOH -12 0 Net Costs of Conversion £/t EtOH 121 244 £/GJ EtOH 4.53 9.14 £/l EtOH 0.096 0.194 £/gasoline-eq. litre EtOH 0.149 0.301 Ethanol Distribution £/t EtOH 10.32 10.32 £/GJ EtOH 0.61 0.61 £/l EtOH 0.013 0.013 £/gasoline-eq. litre EtOH 0.009 0.009 Net Fuel Chain Costs £/t EtOH 231 359 £/GJ EtOH 8.66 13.46 £/l EtOH 0.184 0.286 £/gasoline-eq. litre EtOH 0.285 0.444 Lower cost production derives credits from sales of electricity produced using lignin co- product as fuel. Electricity production rate is 0.23kWhe per litre EtOh and electricity sold at 6p/kWhe. Higher cost production has no co-product credit. Lower feedstock costs are based on wheat straw price of £25/t and high yield of 0.266 t EtOH/t straw, higher feedstock costs are based on straw price of £25/ and low yield of 0.252 t EtOH/t straw
Appendix I - Breakdown of Fuel Chain Costs 96 Production Costs for Bio-diesel from Rapeseed Oil Low High Feedstock Costs £/t RME 380 653 £/GJ RME 10.18 17.51 £/l RME 0.334 0.574 £/diesel-eq. litre RME 0.363 0.625 Feedstock Transport Costs £/t RME 22.75 22.75 £/GJ RME 0.61 0.61 £/l RME 0.020 0.020 £/diesel-eq. litre RME 0.022 0.022 Total Production Costs, £/t RME 229 229 Total revenues from co-products, £/t RME -241 0 Net Costs of Conversion £/t RME -12 229 £/GJ RME -0.31 6.14 £/l RME -0.010 0.201 £/diesel-eq. litre RME -0.011 0.219 RME Distribution £/t RME 7.46 7.46 £/GJ RME 0.20 0.20 £/l RME 0.007 0.007 £/diesel-eq. litre RME 0.007 0.007 Net Fuel Chain Costs £/t RME 398 912 £/GJ RME 10.68 24.46 £/l RME 0.350 0.802 £/diesel-eq. litre RME 0.381 0.873 Feedstock cost for lower-cost production based on £153.8/t (Cambridge; fixed costs down by 35%) and high yield of 0.405 t RME/t seed ; Feedstock cost for higher-cost production based on £203.8/t (Cambridge; standard assumptions) and low yield of 0.312 t RME/t seed. Revenues from co-products for low cost production represent the maximum practical financial return, based on combined value of straw (£25/t straw and 1.6 t straw/t seed), glycerine (£388/t crude glycerine and 45 kg glycerine/t seed) and rape meal (£95.5/t and 630 kg/t seed)
Appendix I - Breakdown of Fuel Chain Costs 97 Production Costs for Electricity from Wheat Straw Low High Feedstock Costs £/odt 29.8 29.8
£/kWhe 0.023 0.023 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6.0
£/kWhe 0.005 0.005 Capital Costs Total capital cost, £/kWe 1700 1700 Annualised capital cost % of Capex 12% 12% £/kWe/a 200 200 £/kWhe 0.025 0.025 O&M Costs @3% of Capex £/kWe/a 51.0 51.0
£/kWhe 0.006 0.006 Total Costs
£/kWhe 0.060 0.060 Plant lifetime 20 years Discount rate 10% Electrical efficiency 32 % Full load operating hours 7884 hpa Feedstock costs based on £25/t wheat straw as received
Appendix I - Breakdown of Fuel Chain Costs 98 Production Costs for Electricity from Miscanthus Low High Feedstock Costs £/odt 36.4 46.5
£/kWhe 0.023 0.029 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6.0
£/kWhe 0.004 0.004 Capital Costs Total capital cost, £/kWe 1700 1700 Annualised capital cost % of Capex 12% 12% £/kWe/a 200 200 £/kWhe 0.027 0.027 O&M Costs @3% of Capex £/kWe/a 51.0 51.0
£/kWhe 0.007 0.007 Total Costs
£/kWhe 0.060 0.066 Plant lifetime 20 years Discount rate 10% Electrical efficiency 32 % Full load operating hours 7884 hpa Lower feedstock costs based on £36.4/odt Miscanthus (high yields - 3.5% discount rate, 18odt/ha). Higher costs based on £46.5/odt (standard assumptions - 6% discount rate, 14odt/ha)
Appendix I - Breakdown of Fuel Chain Costs 99 Production Costs for Electricity from Willow SRC Low High Feedstock Costs £/odt 51.2 65.9
£/kWhe 0.031 0.040 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6.0
£/kWhe 0.003 0.003 Capital Costs Total capital cost, £/kWe 1000 1700 Annualised capital cost % of Capex 12% 12% £/kWe/a 117 200 £/kWhe 0.016 0.027 O&M Costs @3% of Capex £/kWe/a 30.0 51.0
£/kWhe 0.004 0.007 Total Costs
£/kWhe 0.054 0.077 Plant lifetime 20 years Discount rate 10% Electrical efficiency 32 % Full load operating hours 7884 hpa Lower feedstock costs based on £51.2/odt willow (high yields - 3.5% discount rate, 12odt/ha). Higher costs based on £65.9/odt (standard assumptions - 6% discount rate, 9odt/ha)
Appendix I - Breakdown of Fuel Chain Costs 100 Production Costs for Heat from Wheat Straw Low High Feedstock Costs £/odt 29.8 29.8 £/GJ heat output 2.37 2.37 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6.0 £/GJ heat output 0.48 0.48 Capital Costs Total capital cost, £/kWth 200 300 Annualised capital cost % of Capex 12% 12% £/kWth/a 23.5 35.2 £/GJ heat output 0.88 1.31 O&M Costs @3% of Capex £/kWth/a 6.0 9.0 £/GJ heat output 0.22 0.34 Total Costs £/GJ heat output 3.941 4.492 £/kWhth 0.014 0.016 Plant lifetime 20 years Discount rate 10% Thermal efficiency 87.5 % Full load operating hours 7884 hpa Feedstock costs based on £25/t wheat straw as received
Appendix I - Breakdown of Fuel Chain Costs 101 Production Costs for Heat from Miscanthus Low High Feedstock Costs £/odt 36.4 46.5 £/GJ heat output 2.40 3.07 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6.0 £/GJ heat output 0.40 0.40 Capital Costs Total capital cost, £/kWth 200 300 Annualised capital cost % of Capex 12% 12% £/kWth/a 23.5 35.2 £/GJ heat output 0.88 1.31 O&M Costs @3% of Capex £/kWth/a 6.0 9.0 £/GJ heat output 0.22 0.34 Total Costs £/GJ heat output 3.901 5.119 £/kWhth 0.014 0.018 Plant lifetime 20 years Discount rate 10% Thermal efficiency 87.5 % Full load operating hours 7884 hpa Lower feedstock costs based on £36.4/odt Miscanthus (high yields - 3.5% discount rate, 18odt/ha). Higher costs based on £46.5/odt (standard assumptions - 6% discount rate, 14odt/ha)
Appendix I - Breakdown of Fuel Chain Costs 102 Production Costs for Heat from Willow SRC Low High Feedstock Costs £/odt 51.2 65.9 £/GJ heat output 3.18 4.09 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6.0 £/GJ heat output 0.37 0.37 Capital Costs Total capital cost, £/kWth 200 300 Annualised capital cost % of Capex 12% 12% £/kWth/a 23.5 35.2 £/GJ heat output 0.88 1.31 O&M Costs @3% of Capex £/kWth/a 6.0 9.0 £/GJ heat output 0.22 0.34 Total Costs £/GJ heat output 4.649 6.111 £/kWhth 0.017 0.022 Plant lifetime 20 years Discount rate 10% Thermal efficiency 87.5 % Full load operating hours 7884 hpa Lower feedstock costs based on £51.2/odt willow (high yields - 3.5% discount rate, 12odt/ha). Higher costs based on £65.9/odt (standard assumptions - 6% discount rate, 9odt/ha)
Appendix I - Breakdown of Fuel Chain Costs 103 Production Costs for Electricity from Wheat Straw using CHP Low High Feedstock Costs £/odt 29.8 29.8
£/kWhe 0.026 0.026 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6
£/kWhe 0.005 0.005 Capital Costs Total capital cost, £/kWe 2300 2300 Annualised capital cost % of Capex 12% 12% £/kWe/a 270.2 270.2 £/kWhe 0.036 0.036 O&M Costs @3% of Capex £/kWe/a 69 69 £/kWhe 0.009 0.009 Revenues from Heat Sales
£/kWhheat 0.015 0.010 £/kWhe 0.029 0.019 Total Costs
£/kWhe 0.047 0.057 Plant lifetime 20 years Discount rate 10% Electrical efficiency 29% Overall efficiency 87.5 % Full load operating hours 7884 hpa Feedstock costs based on £25/t wheat straw as received
Appendix I - Breakdown of Fuel Chain Costs 104 Production Costs for Electricity from Miscanthus using CHP Low High Feedstock Costs £/odt 36.4 46.5
£/kWhe 0.026 0.033 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6
£/kWhe 0.004 0.004 Capital Costs Total capital cost, £/kWe 2300 2300 Annualised capital cost % of Capex 12% 12% £/kWe/a 270.2 270.2 £/kWhe 0.036 0.036 O&M Costs @3% of Capex £/kWe/a 69 69 £/kWhe 0.009 0.009 Revenues from Heat Sales
£/kWhheat 0.015 0.010 £/kWhe 0.030 0.020 Total Costs
£/kWhe 0.046 0.063 Plant lifetime 20 years Discount rate 10% Electrical efficiency 29% Overall efficiency 87.5 % Full load operating hours 7884 hpa Lower feedstock costs based on £36.4/odt Miscanthus (high yields - 3.5% discount rate, 18odt/ha). Higher costs based on £46.5/odt (standard assumptions - 6% discount rate, 14odt/ha)
Appendix I - Breakdown of Fuel Chain Costs 105 Production Costs for Electricity from Willow SRC using CHP Low High Feedstock Costs £/odt 51.2 65.9
£/kWhe 0.042 0.054 Transport Costs £/mile/odt 0.3 0.3 £/odt 6.0 6
£/kWhe 0.005 0.005 Capital Costs Total capital cost, £/kWe 1500 2500 Annualised capital cost % of Capex 12% 12% £/kWe/a 176.2 293.6 £/kWhe 0.024 0.039 O&M Costs @3% of Capex £/kWe/a 45 75 £/kWhe 0.006 0.010 Revenues from Heat Sales
£/kWhheat 0.015 0.010 £/kWhe 0.038 0.025 Total Costs
£/kWhe 0.038 0.083 Plant lifetime 20 years Discount rate 10% Electrical efficiency 24% Overall efficiency 87.5 % Full load operating hours 7884 hpa Lower feedstock costs based on £51.2/odt willow (high yields - 3.5% discount rate, 12odt/ha). Higher costs based on £65.9/odt (standard assumptions - 6% discount rate, 9odt/ha)
Appendix I - Breakdown of Fuel Chain Costs 106 APPENDIX II. BUDGETS
Gross Margins are the gross revenues for a particular product less the variable costs that are incurred only for the production of that product. Net Margins are the gross margin less the fixed costs (ie those incurred irrespective of whether anything is produced in a particular season) that can be attributed to that enterprise.
Table 1. Costs of Production of Willow, short rotation coppice (£/ha)¹ - Standard assumptions & Specifications Area of Field (ha) 1.00 Handling & Drying (£/odt) 6.0 Energy Crops Aid (€/ha) 45 Marketing (see notes - £/odt) 5.0 Exchange Rate (£/€) 1.50 Cost of labour (£/h) 8.0 Operation Planting H1 H2 H3 H4 H5 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Details Establishment Costs (£)
Planting Density, cuttings / ha 15,350 Cost of cuttings, pence per cut 4.6 Planting Material 709 Planting 284 Ground preparation 132 Sprays and Spraying (Pests & Weeds) 114 Rabbit Fencing Cutback at end of first year 33 Total 1273
Periodic Variable Costs (£) Sprays and Spraying 25 Fertilisers - Rotational Fertilisers - Manures Fertilisers - Every Year Contracting - growing 75 Contracting - harvest 311 311 311 311 311 Marketing Costs 135 135 135 135 135 Misc. Var. Costs Handling & Drying 162 162 162 162 162
Total 608 608 608 608 708
Total Variable Costs (£) 1273 608 608 608 608 708 Cumulative Total Variable Costs 1273 1273 1273 1881 1881 1881 2489 2489 2489 3097 3097 3097 3705 3705 3705 4413
Revenues Price (loaded ex-farm), £/odt 35 35 35 35 35 Yield, odt 27 27 27 27 27 Total Revenues 945 945 945 945 945 Cumulative Revenues 945 945 945 1890 1890 1890 2835 2835 2835 3780 3780 3780 4725 Subsidies 1,030 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Gross Margin (excluding subsidies) -1273 337 337 337 337 237 Cumulative Gross Margin -1273 -1273 -1273 -936 -936 -936 -599 -599 -599 -262 -262 -262 75 75 75 312 Gross Margin (including subsidies) -243 30 30 367 30 30 367 30 30 367 30 30 367 30 30 267
Fixed Costs Overheads Buildings General 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 Rental Value 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 Labour Machinery
Specific Machinery - Unused Energy Crop Storage Equipment Charge Energy Crop Storage Buildings Charge Labour involved in Maintenance Total 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 Cumulative Fixed Costs 260 520 780 1040 1300 1560 1820 2080 2340 2600 2860 3120 3380 3640 3900 4160
Total Costs 1533 260 260 868 260 260 868 260 260 868 260 260 868 260 260 968
Net Margin (excluding subsidies) -1533 -260 -260 77 -260 -260 77 -260 -260 77 -260 -260 77 -260 -260 -23 Cumulative Net Margin -1533 -1793 -2053 -1976 -2236 -2496 -2419 -2679 -2939 -2862 -3122 -3382 -3305 -3565 -3825 -3848 Net Margin (including subsidies) -503 -230 -230 107 -230 -230 107 -230 -230 107 -230 -230 107 -230 -230 7 Cumulative (incl subsidies) -503 -733 -963 -856 -1086 -1316 -1209 -1439 -1669 -1562 -1792 -2022 -1915 -2145 -2375 -2368
Excluding Subsidies Including Subsidies Gross Margin Net margin (2004 £) Gross Margin Net margin (2004 £) NPV @ 8% -415 -2901 NPV @ 8% 871 -1614 AEV @ 8% -43 -303 AEV @ 8% 91 -169 NPV @ 6% -286 -3071 NPV @ 6% 1035 -1750 AEV @ 6% -27 -287 AEV @ 6% 97 -163 NPV @ 3.5% -83 -3337 NPV @ 3.5% 1293 -1962 AEV @ 3.5% -7 -267 AEV @ 3.5% 103 -157 ¹ - Figures in red are imputed, in blue are based on limited data discount rate 8% 6% 3.5% Variable Production costs (AEV costs/ yield odt pa)36.0 35.1 34.0 Fixed Production costs (AEV cost/yld odt pa) 30.8 30.8 30.8 including Land Charges of (£/odt pa) 20.5 20.5 20.5 Tot. Production Cost (Tot. AEV costs/ Tot. yield odt66.9 pa) 65.9 64.8
Costs of Production Total CostsVariable CostsTFixed CostsLand Charges NPV @ 8% 5393 2907 2485 1654 AEV @ 8% 564 304 260 173 NPV @ 6% 5954 3169 2785 1853 AEV @ 6% 556 296 260 173 NPV @ 3.5% 6841 3587 3255 2166 AEV @ 3.5% 547 287 260 173
Specifications Moisture Content 37 % Bulk Density 140 kg (dry matter) per cubic metre Form Chips 15-20mm on-farm Delivery Distance (average) 20 miles Calorific Value (LHV - dry basis) 18.42 MJ/kg
Sources: ECN/phyllis, Energy from Willow, Survey findings
Appendix III - Budgets 107 Table 1B. Costs and Revenues Short Rotation Coppice (£/ha)¹ Assuming a sale price of £25/odt (loaded ex-farm) Area of Field (ha) 1.00 Handling & Drying (£/odt) 6.0 Energy Crops Aid (€/ha) 45 Marketing (see notes - £/odt) 5.0 Exchange Rate (£/€) 1.50 Cost of labour (£/h) 8.0 Operation Planting H1 H2 H3 H4 H5 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Details Establishment Costs (£)
Planting Density, cuttings / ha 15,350 Cost of cuttings, pence per cut 4.6 Planting Material 709 Planting 284 Ground preparation 132 Sprays and Spraying (Pests & Weeds) 114 Rabbit Fencing Cutback at end of first year 33 Total 1273
Periodic Variable Costs (£) Sprays and Spraying 25 Fertilisers - Rotational Fertilisers - Manures Fertilisers - Every Year Contracting - growing 75 Contracting - harvest 311 311 311 311 311 Marketing Costs 135 135 135 135 135 Misc. Var. Costs Handling & Drying 162 162 162 162 162
Total 608 608 608 608 708
Total Variable Costs (£) 1273 608 608 608 608 708 Cumulative Total Variable Costs 1273 1273 1273 1881 1881 1881 2489 2489 2489 3097 3097 3097 3705 3705 3705 4413
Revenues Price (loaded ex-farm), £/odt 25 25 25 25 25 Yield, odt 27 27 27 27 27 Total Revenues 675 675 675 675 675 Cumulative Revenues 675 675 675 1350 1350 1350 2025 2025 2025 2700 2700 2700 3375 Subsidies 1,030 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Gross Margin (excluding subsidies) -1273 67 67 67 67 -33 Cumulative Gross Margin -1273 -1273 -1273 -1206 -1206 -1206 -1139 -1139 -1139 -1072 -1072 -1072 -1005 -1005 -1005 -1038 Gross Margin (including subsidies) -243 30 30 97 30 30 97 30 30 97 30 30 97 30 30 -3
Fixed Costs Overheads Buildings General 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 Rental Value 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 Labour Machinery
Specific Machinery - Unused Energy Crop Storage Equipment Charge Energy Crop Storage Buildings Charge Labour involved in Maintenance Total 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 Cumulative Fixed Costs 260 520 780 1040 1300 1560 1820 2080 2340 2600 2860 3120 3380 3640 3900 4160
Fixed Costs (Included above operations) Machinery - Tractors 43 41 41 41 41 41 Machinery - Implements 13 Labour Hours 6 6.4 6.4 6.4 6.4 6.4
Total Costs 1533 260 260 868 260 260 868 260 260 868 260 260 868 260 260 968
Net Margin (excluding subsidies) -1533 -260 -260 -193 -260 -260 -193 -260 -260 -193 -260 -260 -193 -260 -260 -293 Cumulative Net Margin -1533 -1793 -2053 -2246 -2506 -2766 -2959 -3219 -3479 -3672 -3932 -4192 -4385 -4645 -4905 -5198 Net Margin (including subsidies) -503 -230 -230 -163 -230 -230 -163 -230 -230 -163 -230 -230 -163 -230 -230 -263 Cumulative (incl subsidies) -503 -733 -963 -1126 -1356 -1586 -1749 -1979 -2209 -2372 -2602 -2832 -2995 -3225 -3455 -3718
Excluding Subsidies Including Subsidies Gross Margin Net margin (2004 £) Gross Margin Net margin (2004 £) NPV @ 8% -1127 -3613 NPV @ 8% 159 -2326 AEV @ 8% -118 -378 AEV @ 8% 17 -243 NPV @ 6% -1110 -3895 NPV @ 6% 212 -2574 AEV @ 6% -104 -364 AEV @ 6% 20 -240 NPV @ 3.5% -1084 -4338 NPV @ 3.5% 292 -2963 AEV @ 3.5% -87 -347 AEV @ 3.5% 23 -237 ¹ - Figures in red are imputed, in blue are based on limited data Variable Production costs (costs/ yield odt) 32.7 Fixed Production costs (cost/yld odt) 30.8 including Land Charges of (£/odt) 20.5 Tot. Production Cost (Tot. costs/ Tot. yield odt) 63.5
Appendix III - Budgets 108 Table 1C. Costs of Production of Willow, short rotation coppice (£/ha)¹ - Yield of 12 ODT per Ha per Year Area of Field (ha) 1.00 Handling & Drying (£/odt) 6.0 Energy Crops Aid (€/ha) 45 Marketing (see notes - £/odt) 5.0 Exchange Rate (£/€) 1.50 Cost of labour (£/h) 8.0 Operation Planting H1 H2 H3 H4 H5 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Details Establishment Costs (£)
Planting Density, cuttings / ha 15,350 Cost of cuttings, pence per cut 4.6 Planting Material 709 Planting 284 Ground preparation 132 Sprays and Spraying (Pests & Weeds) 114 Rabbit Fencing Cutback at end of first year 33 Total 1273
Periodic Variable Costs (£) Sprays and Spraying 25 Fertilisers - Rotational Fertilisers - Manures Fertilisers - Every Year Contracting - growing 75 Contracting - harvest 311 311 311 311 311 Marketing Costs 180 180 180 180 180 Misc. Var. Costs Handling & Drying 216 216 216 216 216
Total 707 707 707 707 807
Total Variable Costs (£) 1273 707 707 707 707 807 Cumulative Total Variable Costs 1273 1273 1273 1980 1980 1980 2687 2687 2687 3394 3394 3394 4101 4101 4101 4908
Revenues Price (loaded ex-farm), £/odt 35 35 35 35 35 Yield, odt 36 36 36 36 36 Total Revenues 1260 1260 1260 1260 1260 Cumulative Revenues 1260 1260 1260 2520 2520 2520 3780 3780 3780 5040 5040 5040 6300 Subsidies 1,030 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Gross Margin (excluding subsidies) -1273 553 553 553 553 453 Cumulative Gross Margin -1273 -1273 -1273 -720 -720 -720 -167 -167 -167 386 386 386 939 939 939 1392 Gross Margin (including subsidies) -243 30 30 583 30 30 583 30 30 583 30 30 583 30 30 483
Fixed Costs Overheads Buildings General 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 Rental Value 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 Labour Machinery
Specific Machinery - Unused Energy Crop Storage Equipment Charge Energy Crop Storage Buildings Charge Labour involved in Maintenance Total 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 Cumulative Fixed Costs 260 520 780 1040 1300 1560 1820 2080 2340 2600 2860 3120 3380 3640 3900 4160
Total Costs 1533 260 260 967 260 260 967 260 260 967 260 260 967 260 260 1067
Net Margin (excluding subsidies) -1533 -260 -260 293 -260 -260 293 -260 -260 293 -260 -260 293 -260 -260 193 Cumulative Net Margin -1533 -1793 -2053 -1760 -2020 -2280 -1987 -2247 -2507 -2214 -2474 -2734 -2441 -2701 -2961 -2768 Net Margin (including subsidies) -503 -230 -230 323 -230 -230 323 -230 -230 323 -230 -230 323 -230 -230 223 Cumulative (incl subsidies) -503 -733 -963 -640 -870 -1100 -777 -1007 -1237 -914 -1144 -1374 -1051 -1281 -1511 -1288
Excluding Subsidies Including Subsidies Gross Margin Net margin (2004 £) Gross Margin Net margin (2004 £) NPV @ 8% 154 -2331 NPV @ 8% 1441 -1045 AEV @ 8% 16 -244 AEV @ 8% 151 -109 NPV @ 6% 373 -2412 NPV @ 6% 1694 -1091 AEV @ 6% 35 -225 AEV @ 6% 158 -102 NPV @ 3.5% 718 -2536 NPV @ 3.5% 2094 -1161 AEV @ 3.5% 57 -203 AEV @ 3.5% 167 -93 ¹ - Figures in red are imputed, in blue are based on limited data 8% 6% 3.5% Variable Production costs (AEV costs/ yield odt pa)29.5 28.8 28.1 Fixed Production costs (AEV cost/yld odt pa) 23.1 23.1 23.1 including Land Charges of (£/odt pa) 15.4 15.4 15.4 Tot. Production Cost (Tot. AEV costs/ Tot. yield odt52.6 pa) 51.9 51.2
Costs of Production Total CostsVariable CostsTFixed CostsLand Charges NPV @ 8% 5654 3168 2485 1654 AEV @ 8% 591 331 260 173 NPV @ 6% 6256 3471 2785 1853 AEV @ 6% 584 324 260 173 NPV @ 3.5% 7208 3954 3255 2166 AEV @ 3.5% 576 316 260 173
Appendix III - Budgets 109 Table 1D. Costs of Production of Willow, short rotation coppice (£/ha)¹ - Lower Planting Costs Area of Field (ha) 1.00 Handling & Drying (£/odt) 6.0 Energy Crops Aid (€/ha) 45 Marketing (see notes - £/odt) 5.0 Exchange Rate (£/€) 1.50 Cost of labour (£/h) 8.0 Operation Planting H1 H2 H3 H4 H5 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Details Establishment Costs (£)
Planting Density, cuttings / ha 15,000 Cost of cuttings, pence per cut 3.0 Planting Material 450 Planting 250 Ground preparation 132 Sprays and Spraying (Pests & Weeds) 114 Rabbit Fencing Cutback at end of first year 33 Total 979
Periodic Variable Costs (£) Sprays and Spraying 25 Fertilisers - Rotational Fertilisers - Manures Fertilisers - Every Year Contracting - growing 75 Contracting - harvest 311 311 311 311 311 Marketing Costs 135 135 135 135 135 Misc. Var. Costs Handling & Drying 162 162 162 162 162
Total 608 608 608 608 708
Total Variable Costs (£) 979 608 608 608 608 708 Cumulative Total Variable Costs 979 979 979 1587 1587 1587 2195 2195 2195 2803 2803 2803 3411 3411 3411 4119
Revenues Price (loaded ex-farm), £/odt 35 35 35 35 35 Yield, odt 27 27 27 27 27 Total Revenues 945 945 945 945 945 Cumulative Revenues 945 945 945 1890 1890 1890 2835 2835 2835 3780 3780 3780 4725 Subsidies 1,030 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Gross Margin (excluding subsidies) -979 337 337 337 337 237 Cumulative Gross Margin -979 -979 -979 -642 -642 -642 -305 -305 -305 32 32 32 369 369 369 606 Gross Margin (including subsidies) 51 30 30 367 30 30 367 30 30 367 30 30 367 30 30 267
Fixed Costs Overheads Buildings General 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 Rental Value 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 173 Labour Machinery
Specific Machinery - Unused Energy Crop Storage Equipment Charge Energy Crop Storage Buildings Charge Labour involved in Maintenance Total 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 260 Cumulative Fixed Costs 260 520 780 1040 1300 1560 1820 2080 2340 2600 2860 3120 3380 3640 3900 4160
Total Costs 1239 260 260 868 260 260 868 260 260 868 260 260 868 260 260 968
Net Margin (excluding subsidies) -1239 -260 -260 77 -260 -260 77 -260 -260 77 -260 -260 77 -260 -260 -23 Cumulative Net Margin -1239 -1499 -1759 -1682 -1942 -2202 -2125 -2385 -2645 -2568 -2828 -3088 -3011 -3271 -3531 -3554 Net Margin (including subsidies) -209 -230 -230 107 -230 -230 107 -230 -230 107 -230 -230 107 -230 -230 7 Cumulative (incl subsidies) -209 -439 -669 -562 -792 -1022 -915 -1145 -1375 -1268 -1498 -1728 -1621 -1851 -2081 -2074
Excluding Subsidies Including Subsidies Gross Margin Net margin (2004 £) Gross Margin Net margin (2004 £) NPV @ 8% -122 -2607 NPV @ 8% 1165 -1321 AEV @ 8% -13 -273 AEV @ 8% 122 -138 NPV @ 6% 7 -2778 NPV @ 6% 1329 -1456 AEV @ 6% 1 -259 AEV @ 6% 124 -136 NPV @ 3.5% 211 -3044 NPV @ 3.5% 1586 -1668 AEV @ 3.5% 17 -243 AEV @ 3.5% 127 -133 ¹ - Figures in red are imputed, in blue are based on limited data 8% 6% 3.5% Variable Production costs (AEV costs/ yield odt pa)32.4 31.8 31.2 Fixed Production costs (AEV cost/yld odt pa) 30.8 30.8 30.8 including Land Charges of (£/odt pa) 20.5 20.5 20.5 Tot. Production Cost (Tot. AEV costs/ Tot. yield odt63.2 pa) 62.6 62.0
Costs of Production Total CostsVariable CostsTFixed CostsLand Charges NPV @ 8% 5099 2614 2485 1654 AEV @ 8% 533 273 260 173 NPV @ 6% 5661 2876 2785 1853 AEV @ 6% 528 268 260 173 NPV @ 3.5% 6548 3293 3255 2166 AEV @ 3.5% 523 263 260 173
Appendix III - Budgets 110 Table 2. Costs and Revenues of Miscanthus, straw (£/ha)¹ - Standard assumptions & Specifications Area (ha) 1.0 Handling & Drying (£/odt) 4 Energy Crops Aid (€/ha) 45 Cost of labour (£/h) 8 Exchange Rate (£/€) 1.5 Operation Planting H1 H2 H3 H4 H5 H6 H7 H8 H9 H10 H11 H12 H13 H14 H15 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Details Establishment Costs (£)
Planting Density, cuttings / ha 13,950 Cost of plants, pence per rhizome 13 Planting (incl. planting material) 1518 Ground preparation 117 Sprays and Spraying (Pests & Weeds) 56
Total 1691
Periodic Variable Costs (£) Sprays and Spraying 25 Fertilisers - applied once only Fertilisers - Manures Fertilisers - Every Year Contracting - growing 75 Contracting - harvest 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 Marketing Costs (loading) 19 32 45 45 45 45 45 45 45 45 45 45 45 45 45 Misc. Var. Costs Handling & Drying 24 40 56 56 56 56 56 56 56 56 56 56 56 56 56
Total 135 164 193 193 193 193 193 193 193 193 193 193 193 193 293
Total Variable Costs (£) 1691 135 164 193 193 193 193 193 193 193 193 193 193 193 193 293 Cumulative Total Variable Costs 1691 1826 1990 2183 2376 2569 2762 2955 3148 3341 3534 3727 3920 4113 4306 4599
Revenues Price (loaded ex-farm), £/odt 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 Yield, odt 6 10 14 14 14 14 14 14 14 14 14 14 14 14 14 Total Revenues 150 250 350 350 350 350 350 350 350 350 350 350 350 350 350 Cumulative Revenues 150 400 750 1100 1450 1800 2150 2500 2850 3200 3550 3900 4250 4600 4950 Subsidies 920 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Gross Margin (excluding subsidies) -1691 15 86 157 157 157 157 157 157 157 157 157 157 157 157 57 Cumulative Gross Margin -1691 -1676 -1590 -1433 -1276 -1119 -962 -805 -648 -491 -334 -177 -20 137 294 351 Gross Margin (incl subs) -771 45 116 187 187 187 187 187 187 187 187 187 187 187 187 87
Fixed Costs Overheads Buildings General 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 Rent 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 Labour Machinery
Specific Machinery - Unused Energy Crop Storage Equipment Charge Energy Crop Storage Buildings Charge Labour involved in Maintenance Total 246 246 246 246 246 246 246 246 246 246 246 246 246 246 246 246 Cumulative Fixed Costs 246 492 738 984 1230 1476 1722 1968 2214 2460 2706 2952 3198 3444 3690 3936
Fixed Costs (Included above operations) Machinery - Tractors 52 Machinery - Implements 16 Labour Hours 3.4 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
Total Costs -1937 -381 -410 -439 -439 -439 -439 -439 -439 -439 -439 -439 -439 -439 -439 -539
Net Margin (excluding subsidies) -1937 -231 -160 -89 -89 -89 -89 -89 -89 -89 -89 -89 -89 -89 -89 -189 Cumulative Net Margin -1937 -2168 -2328 -2417 -2506 -2595 -2684 -2773 -2862 -2951 -3040 -3129 -3218 -3307 -3396 -3585 Net Margin (including subsidies) -1017 -201 -130 -59 -59 -59 -59 -59 -59 -59 -59 -59 -59 -59 -59 -159 Cumulative (incl subsidies) -1017 -1218 -1348 -1407 -1466 -1525 -1584 -1643 -1702 -1761 -1820 -1879 -1938 -1997 -2056 -2215
Excluding Subsidies Including Subsidies Gross Margin Net margin (2004 £) Gross Margin Net margin (2004 £) NPV @ 8% -571 -2923 NPV @ 8% 605 -1746 AEV @ 8% -60 -306 AEV @ 8% 63 -183 NPV @ 6% -405 -3041 NPV @ 6% 806 -1829 AEV @ 6% -38 -284 AEV @ 6% 75 -171 NPV @ 3.5% -146 -3226 NPV @ 3.5% 1119 -1960 AEV @ 3.5% -12 -258 AEV @ 3.5% 89 -157 ¹ - Figures in red are imputed, in blue are based on limited data discount rate 8% 6% 3.5% Variable Production costs (AEV costs/ yield odt27.9 pa) 26.6 25.1 Fixed Production costs (AEV cost/yld odt pa)19.9 19.9 19.9 including Land Charges of (£/odt pa) 12.8 12.8 12.8 Tot. Production Cost (Tot. AEV costs/ Tot. yield47.7 odt pa) 46.5 45.0
Costs of Production Total CostsVariable CostsTFixed CostsLand Charges NPV @ 8% -5648 3296 2352 1520 AEV @ 8% -591 345 246 159 NPV @ 6% -6162 3527 2635 1703 AEV @ 6% -575 329 246 159 NPV @ 3.5% -6970 3891 3079 1990 AEV @ 3.5% -557 311 246 159
Specifications Moisture Content 20 % Bulk Density 137 kg (dry matter) per cubic metre Form Heston bales - 1.25 x 1.3 x 2.375 metres Delivery Distance (average) 20 miles Delivery Cost 0.3 £/mile/odt Net Calorific Value (dry basis) 17.3 MJ/kg
Sources: Newman DTI, Survey findings
Appendix III - Budgets 111 Table 2B. Costs and Revenues of Miscanthus, straw (£/ha)¹ - Yield of 18 odt/ha/year when mature Area (ha) 1.0 Handling & Drying (£/odt) 4 Energy Crops Aid (€/ha) 45 Cost of labour (£/h) 8 Exchange Rate (£/€) 1.5 Operation Planting H1 H2 H3 H4 H5 H6 H7 H8 H9 H10 H11 H12 H13 H14 H15 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Details Establishment Costs (£)
Planting Density, cuttings / ha 13,950 Cost of plants, pence per rhizome 13 Planting (incl. planting material) 1518 Ground preparation 117 Sprays and Spraying (Pests & Weeds) 56
Total 1691
Periodic Variable Costs (£) Sprays and Spraying 25 Fertilisers - applied once only Fertilisers - Manures Fertilisers - Every Year Contracting - growing 75 Contracting - harvest 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 Marketing Costs (loading) 18 42 54 54 54 54 54 54 54 54 54 54 54 54 54 Misc. Var. Costs Handling & Drying 24 56 72 72 72 72 72 72 72 72 72 72 72 72 72
Total 134 190 218 218 218 218 218 218 218 218 218 218 218 218 318
Total Variable Costs (£) 1691 134 190 218 218 218 218 218 218 218 218 218 218 218 218 318 Cumulative Total Variable Costs 1691 1825 2015 2233 2451 2669 2887 3105 3323 3541 3759 3977 4195 4413 4631 4949
Revenues Price (loaded ex-farm), £/odt 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 Yield, odt 6 14 18 18 18 18 18 18 18 18 18 18 18 18 18 Total Revenues 150 350 450 450 450 450 450 450 450 450 450 450 450 450 450 Cumulative Revenues 150 500 950 1400 1850 2300 2750 3200 3650 4100 4550 5000 5450 5900 6350 Subsidies 920 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Gross Margin (excluding subsidies) -1691 16 160 232 232 232 232 232 232 232 232 232 232 232 232 132 Cumulative Gross Margin -1691 -1675 -1515 -1283 -1051 -819 -587 -355 -123 109 341 573 805 1037 1269 1401 Gross Margin (incl subs) -771 46 190 262 262 262 262 262 262 262 262 262 262 262 262 162
Fixed Costs Overheads Buildings General 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 Rent 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 Labour Machinery
Specific Machinery - Unused Energy Crop Storage Equipment Charge Energy Crop Storage Buildings Charge Labour involved in Maintenance Total 246 246 246 246 246 246 246 246 246 246 246 246 246 246 246 246 Cumulative Fixed Costs 246 492 738 984 1230 1476 1722 1968 2214 2460 2706 2952 3198 3444 3690 3936
Fixed Costs (Included above operations) Machinery - Tractors 52 Machinery - Implements 16 Labour Hours 3.4 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
Total Costs -1937 -380 -436 -464 -464 -464 -464 -464 -464 -464 -464 -464 -464 -464 -464 -564
Net Margin (excluding subsidies) -1937 -230 -86 -14 -14 -14 -14 -14 -14 -14 -14 -14 -14 -14 -14 -114 Cumulative Net Margin -1937 -2167 -2253 -2267 -2281 -2295 -2309 -2323 -2337 -2351 -2365 -2379 -2393 -2407 -2421 -2535 Net Margin (including subsidies) -1017 -200 -56 16 16 16 16 16 16 16 16 16 16 16 16 -84 Cumulative (incl subsidies) -1017 -1217 -1273 -1257 -1241 -1225 -1209 -1193 -1177 -1161 -1145 -1129 -1113 -1097 -1081 -1165
Excluding Subsidies Including Subsidies Gross Margin Net margin (2004 £) Gross Margin Net margin (2004 £) NPV @ 8% 2 -2350 NPV @ 8% 1178 -1173 AEV @ 8% 0 -246 AEV @ 8% 123 -123 NPV @ 6% 253 -2383 NPV @ 6% 1464 -1171 AEV @ 6% 24 -222 AEV @ 6% 137 -109 NPV @ 3.5% 645 -2434 NPV @ 3.5% 1911 -1168 AEV @ 3.5% 52 -194 AEV @ 3.5% 153 -93 ¹ - Figures in red are imputed, in blue are based on limited data discount rate 8% 6% 3.5% Variable Production costs (AEV costs/ yield odt23.0 pa) 22.0 20.9 Fixed Production costs (AEV cost/yld odt pa)15.5 15.5 15.5 including Land Charges of (£/odt pa) 10.0 10.0 10.0 Tot. Production Cost (Tot. AEV costs/ Tot. yield38.5 odt pa) 37.5 36.4
Costs of Production Total CostsVariable CostsTFixed CostsLand Charges NPV @ 8% -5838 3487 2352 1520 AEV @ 8% -611 365 246 159 NPV @ 6% -6381 3746 2635 1703 AEV @ 6% -596 350 246 159 NPV @ 3.5% -7233 4154 3079 1990 AEV @ 3.5% -578 332 246 159
Appendix III - Budgets 112 Table 2C. Costs and Revenues of Miscanthus, straw (£/ha)¹ - Reduced Planting Costs Area (ha) 1.0 Handling & Drying (£/odt) 4 Energy Crops Aid (€/ha) 45 Cost of labour (£/h) 8 Exchange Rate (£/€) 1.5 Operation Planting H1 H2 H3 H4 H5 H6 H7 H8 H9 H10 H11 H12 H13 H14 H15 Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Details Establishment Costs (£)
Planting Density, cuttings / ha 10,000 Cost of plants, pence per rhizome 5 Planting (incl. planting material) 750 Ground preparation 117 Sprays and Spraying (Pests & Weeds) 56
Total 923
Periodic Variable Costs (£) Sprays and Spraying 25 Fertilisers - applied once only Fertilisers - Manures Fertilisers - Every Year Contracting - growing 75 Contracting - harvest 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 Marketing Costs (loading) 19 32 45 45 45 45 45 45 45 45 45 45 45 45 45 Misc. Var. Costs Handling & Drying 24 40 56 56 56 56 56 56 56 56 56 56 56 56 56
Total 135 164 193 193 193 193 193 193 193 193 193 193 193 193 293
Total Variable Costs (£) 923 135 164 193 193 193 193 193 193 193 193 193 193 193 193 293 Cumulative Total Variable Costs 923 1058 1222 1415 1608 1801 1994 2187 2380 2573 2766 2959 3152 3345 3538 3831
Revenues Price (loaded ex-farm), £/odt 25 25 25 25 25 25 25 25 25 25 25 25 25 25 25 Yield, odt 6 10 14 14 14 14 14 14 14 14 14 14 14 14 14 Total Revenues 150 250 350 350 350 350 350 350 350 350 350 350 350 350 350 Cumulative Revenues 150 400 750 1100 1450 1800 2150 2500 2850 3200 3550 3900 4250 4600 4950 Subsidies 920 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Gross Margin (excluding subsidies) -923 15 86 157 157 157 157 157 157 157 157 157 157 157 157 57 Cumulative Gross Margin -923 -908 -822 -665 -508 -351 -194 -37 120 277 434 591 748 905 1062 1119 Gross Margin (incl subs) -3 45 116 187 187 187 187 187 187 187 187 187 187 187 187 87
Fixed Costs Overheads Buildings General 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87 Rent 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 Labour Machinery
Specific Machinery - Unused Energy Crop Storage Equipment Charge Energy Crop Storage Buildings Charge Labour involved in Maintenance Total 246 246 246 246 246 246 246 246 246 246 246 246 246 246 246 246 Cumulative Fixed Costs 246 492 738 984 1230 1476 1722 1968 2214 2460 2706 2952 3198 3444 3690 3936
Fixed Costs (Included above operations) Machinery - Tractors 52 Machinery - Implements 16 Labour Hours 3.4 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8
Total Costs -1169 -381 -410 -439 -439 -439 -439 -439 -439 -439 -439 -439 -439 -439 -439 -539
Net Margin (excluding subsidies) -1169 -231 -160 -89 -89 -89 -89 -89 -89 -89 -89 -89 -89 -89 -89 -189 Cumulative Net Margin -1169 -1400 -1560 -1649 -1738 -1827 -1916 -2005 -2094 -2183 -2272 -2361 -2450 -2539 -2628 -2817 Net Margin (including subsidies) -249 -201 -130 -59 -59 -59 -59 -59 -59 -59 -59 -59 -59 -59 -59 -159 Cumulative (incl subsidies) -249 -450 -580 -639 -698 -757 -816 -875 -934 -993 -1052 -1111 -1170 -1229 -1288 -1447
Excluding Subsidies Including Subsidies Gross Margin Net margin (2004 £) Gross Margin Net margin (2004 £) NPV @ 8% 197 -2155 NPV @ 8% 1373 -978 AEV @ 8% 21 -225 AEV @ 8% 144 -102 NPV @ 6% 363 -2273 NPV @ 6% 1574 -1061 AEV @ 6% 34 -212 AEV @ 6% 147 -99 NPV @ 3.5% 622 -2458 NPV @ 3.5% 1887 -1192 AEV @ 3.5% 50 -196 AEV @ 3.5% 151 -95 ¹ - Figures in red are imputed, in blue are based on limited data discount rate 8% 6% 3.5% Variable Production costs (AEV costs/ yield odt21.4 pa) 20.8 20.2 Fixed Production costs (AEV cost/yld odt pa)19.9 19.9 19.9 including Land Charges of (£/odt pa) 12.8 12.8 12.8 Tot. Production Cost (Tot. AEV costs/ Tot. yield41.3 odt pa) 40.7 40.0
Costs of Production Total CostsVariable CostsTFixed CostsLand Charges NPV @ 8% -4880 2528 2352 1520 AEV @ 8% -510 264 246 159 NPV @ 6% -5394 2759 2635 1703 AEV @ 6% -504 258 246 159 NPV @ 3.5% -6202 3123 3079 1990 AEV @ 3.5% -495 249 246 159
Appendix III - Budgets 113 Table 3. Costs and Revenues of Energy Crop Production - Arable Crops (£/ha)¹ Farmer Profit £/ 500 kg bale Straw 1.50 Yield of Cereal Straw (t/ha) 5
Crop Winter Wheat Sugar Beet OSR Surplus Potatoes Whole-Crop Cereals Straw + Wheat
Variable Costs Seed 36.5 137.1 28.1 607.7 36.5 36.5 Sprays 117.1 126.1 95.9 326.7 117.1 117.1 Fertilisers 82.3 134.7 84.4 189.9 82.3 82.3 Contract 4.0 128.5 7.3 139.5 4.0 4.0 Casual Labour 0.8 2.3 0.6 121.4 0.8 0.8 Misc. Var. Costs 10.0 200.0 4.6 83.1 10.0 10.0
Total Variable Costs (£) 251 729 221 1468 251 251
Revenues Price £/tonne 69.5 24.0 145.2 35.0 30.0 69.5 Yield, tonnes 7.9 52.9 3.6 46.6 12.9 7.9 Net Revenues from Straw (£/ha) 15.0 Total Revenues from Sales 551.2 1269.6 525.6 1631.0 387.9 566.2
Gross Margin (excluding subsidies) 301 541 305 163 137 316
Fixed Costs Overheads Labour 100 100 100 191 100 100 Machinery&Power 173 173 173 250 138 173 Other Overheads 70 70 70 92 70 70 Rental Value 142 142 142 156 142 142 Unallocated Contract 32 32 32 41 32 32
Total Fixed Costs 517 517 517 729 482 517
Total Costs 767 1245 738 2197 733 767
Net Margin (excluding subsidies) -216 24 -212 -566 -345 -201
Variable Production costs (costs/ t yield) 32 14 61 32 19 Fixed Production costs (£/t) 65 10 143 16 37 including Land Charges of (£/t) 18 3 39 3 11 Tot. Production Cost (Tot. costs/ Tot. yield t) 97 24 204 47 57
¹ - Figures in red are imputed (see notes)
Appendix III - Budgets 114